Castelnau Group Regulatory News (CGL)

12 Sep 2005 07:02

Catlin Group Limited12 September 2005 CATLIN GROUP LIMITED ANNOUNCES INTERIM RESULTS FOR PERIOD ENDED 30 JUNE 2005 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 2005. Financial highlights: • Net income increased to record US$111.2 million (30 June 2004: US$95.8 million)• Annualised weighted return on average equity was 22.0 per cent (30 June 2004: 23.3 per cent)• Book value per share grew by 7.8 per cent from US$6.30 at 31 December 2004 to US$6.79; in sterling terms this increase is 15.5 per cent from £3.28 to £3.79• Gross premiums written decreased to US$781.7 million (30 June 2004: US$935.3 million) due to disciplined underwriting and timing of premiums written• Net premiums earned increased to US$627.1 million (30 June 2004: US$548.2 million)• Combined ratio was stable at 82.3 per cent (30 June 2004: 81.8 per cent) despite increasing competitive pressures and does not reflect any significant releases from prior year reserves• Earnings per share of 72 US cents (30 June 2004: 62 US cents*)• Interim dividend increased to 9.9 US cents (5.4 pence) per share (30 June 2004: 7.9 US cents; 4.3 pence) For the six months ended 30 JuneUS$000 except where indicated 2005 2004 % change --------- --------- ---------Gross premiums written 781,739 935,300 -16.4%Net premiums written 658,695 795,343 -17.2%Net premiums earned 627,086 548,230 14.4%Income before income tax expense 126,335 112,627 12.2%Net income 111,175 95,846 16.0%Earnings per share (US$)* 0.72 0.62 16.1%Interim dividend per share (US cents) 9.9 7.9 25.3%Book value per share (US$) 6.79 5.93 14.5%Effective tax rate 12.0% 14.9% --Combined ratio 82.3% 81.8% --Annualised weighted return on averageequity 22.0% 23.3% -- * 30 June 2004 figure is pro forma based on 154.1 million shares in issue Operational highlights: • Hurricane Katrina provisional loss estimate of $275 million gross of reinsurance, $125 million net of reinsurance; comparable with 2004 hurricane losses; will be reflected in second half results• Weighted average rate decrease of 2 per cent during period ended 30 June 2005 (30 June 2004: 2 per cent increase)• Continued growth in Catlin Bermuda and Catlin UK business segments; 51 per cent of gross premiums written by these segments (30 June 2004: 27 per cent)• Positive contribution to profits from all business segments• Establishment of underwriting offices in Belgium, Canada and Guernsey• Establishment of Catlin Insurance Company (UK) Ltd (Catlin UK) as a separate subsidiary, replacing previous UK branch office of Catlin Bermuda• Agreement in principle reached to purchase US shell insurance company, allowing Catlin to develop a fourth underwriting platform writing admitted business in 27 states Commenting on the Group's interim results, Chief Executive Stephen Catlin said: "The first half of 2005 was a successful period for Catlin with both net incomeand book value per share increasing substantially. This performance demonstratesCatlin's determination to underwrite in a disciplined manner as marketcompetition increases. "Hurricane Katrina has caused widespread economic and human loss in the UnitedStates, and our thoughts are very much with the residents of New Orleans andsurrounding areas at this difficult time. The staff of our New Orleans office,and their families, are safe and accounted for. We have, for the interim,relocated our New Orleans employees, and they are working from our Houstonoffice. Our priority now is to ensure that our policyholders in the impactedareas receive first class claims handling services. "Estimates of the impact of Hurricane Katrina on the Catlin Group arenecessarily provisional and subject to significant uncertainty at this time. Weestimate that losses arising from Hurricane Katrina will be of the order ofUS$275 million gross of reinsurance and US$125 million net, figures that arecomparable with the losses sustained by the Group in respect of the 2004hurricanes. We currently expect Hurricane Katrina to have a positive impact onrates in many classes of business. "Notwithstanding the positive effect of any rate rises resulting from HurricaneKatrina, we expect gross premiums written for the full year 2005 to be lowerthan in 2004. However, the year on year decline at 30 June is exaggerated by thetiming of the underwriting of some risks. If these timing effects are excluded,the decrease in gross premiums written for the period ended 30 June 2005 wouldhave been approximately 10 per cent. We are managing our portfolio across all ofour underwriting classes to ensure maximisation of margin and efficient use ofcapital in challenging market conditions. The development of the Group'sbusiness has been consistent with our underlying strategy. "We are also pleased to announce an increase in the interim dividend toshareholders, which demonstrates management's confidence in the ongoing successof our business." - 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, Tel: +44 (0)20 7379 5151The Maitland Consultancy E-mail emorley@maitland.co.ukInvestor 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: 1. The Catlin Group, headquartered in Bermuda, is an international specialistproperty/casualty insurer and reinsurer writing more than 30 classes of businessworldwide. Catlin wrote gross premiums of US$1.43 billion and reported recordnet income of US$154.1 million in 2004. Catlin shares are traded on the LondonStock Exchange (ticker symbol: 'CGL'). 2. The Catlin Group currently operates three underwriting platforms: • The Catlin Syndicate at Lloyd's of London (Syndicate 2003). The Catlin Syndicate is the eighth largest syndicate at Lloyd's based on 2005 premium capacity of £500 million. It is a recognised leader of numerous classes of specialty insurance and reinsurance. Over the past 20 years, the Catlin Syndicate and its predecessors have consistently outperformed the Lloyd's market as a whole. • Catlin Bermuda (Catlin Insurance Company Ltd.). Catlin Bermuda underwrites property treaty and casualty treaty reinsurance and property and casualty insurance for US risks on a surplus lines basis. • Catlin UK (Catlin Insurance Company (UK) Ltd.). Catlin UK specialises in writing commercial property, general liability, professional indemnity, directors' and officers' liability and commercial crime insurance for UK clients. It also writes other classes of business written by the Catlin Syndicate. All three Catlin underwriting platforms have a financial strength rating of 'A'(Excellent) from A.M. Best Company. The Catlin Group also operates subsidiaries located in Houston and New Orleansin the US, as well as in the UK, Guernsey, Canada, Germany, Belgium, Singapore,Malaysia and Australia. These subsidiaries, which underwrite on behalf ofCatlin's underwriting platforms, allow Catlin to work more closely with localclients and their brokers. 3. Catlin management will make a presentation to investment analysts at10.30am BST today at its London office. The presentation will be broadcast liveon the Group's website (www.catlin.com). The webcast will also be available onthe website following the presentation. 4. 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. 5. Rates of exchange at 30 June 2005 - balance sheet: £1=US$1.79 (30 June2004: US$1.81); income statement: £1=US$1.88 (30 June 2004: US$1.82). 6. Detailed information regarding Catlin's financial results for the sixmonths ended 30 June 2005, including unaudited consolidated financialstatements, is attached. 7. The Catlin Group's website can be found at www.catlin.com. Financial Results The Catlin Group is pleased to report record net income for the first half of2005. This performance is a direct result of our unyielding commitment todisciplined underwriting, the successful initiatives that we have previously putin place and our flexible multi-platform underwriting structure. Earned premiumgrowth is continuing, and this, together with ongoing excellent operatingratios, has contributed to the record profit performance. The Group's net income before income taxes increased 12.2 per cent to US$126.3million (30 June 2004: US$112.6 million), whilst net income rose by 16.0 percent to US$111.2 million (30 June 2004: US$95.8 million). The Group's annualisedreturn on average equity for the six months was 22.0 per cent (30 June 2004:23.3 per cent), reflecting the increased levels of both net income andstockholders' equity. Book value per share increased by 7.8 per cent fromUS$6.30 at 31 December 2004 to US$6.79 at 30 June 2005. In sterling terms, thisis a 15.5 per cent increase, from £3.28 to £3.79. Net income is stated after allowing for the effect of the stronger dollar, whichhas resulted in foreign exchange losses of US$21.5 million (30 June 2004: US$3.2million). Almost all of the foreign exchange effect relates to losses on there-translation of intra-Group net assets held by Catlin Bermuda, which aredenominated in sterling. These foreign exchange effects have no significanteconomic impact, and offsetting intra-Group entries are reflected instockholders' equity. The impact of foreign exchange on the income statement isgreater under US Generally Accepted Accounting Principles ('US GAAP') than underInternational Financial Reporting Standards ('IFRS'). If the Group reportedunder IFRS, net income for the period would have been approximately 10 per centgreater. The Group's net result from underwriting operations, as shown in the tablebelow, rose by 14.4 per cent to US$109.4 million (30 June 2004: US$95.6million). The combined ratio at 30 June 2005 was 82.3 per cent (30 June 2004:81.8 per cent), reflecting the Group's highly selective underwriting and thegenerally low incidence of losses in the period. Gross premiums written decreased by 16.4 per cent during the first six months of2005 to US$781.7 million (30 June 2004: US$935.3 million). If timing differencesare excluded, gross premiums written during the period would have decreased byapproximately 10 per cent. Management does not currently expect the decrease ingross written premiums at 31 December 2005 to be as large in percentage terms asat 30 June 2005. The Group's approach to both new and renewal business has beenhighly selective, such that the decrease in weighted average premium ratesduring the period was 2 per cent. Gross premiums written were also impacted byexchange rate effects for non-dollar business. Net premiums earned increased by 14.4 per cent to US$627.1 million (30 June2004: US$548.2 million). The Group maintained its conservative investment philosophy during the period,with assets of US$2.22 billion (30 June 2004: US$1.71 billion) investedprimarily in fixed maturities and cash and cash equivalents. Net investmentincome and net realised gains on investments amounted to US$38.2 million (30June 2004: US$20.1 million). The annualised total return on average investmentswas 3.1 per cent (30 June 2004: 1.7 per cent), reflecting the higher yieldsavailable in the most recent period. With effect from 1 January 2005, the Group is no longer amortising purchasedsyndicate capacity; this intangible asset has a balance sheet value of US$51million at 30 June 2005. Amortisation of this asset reported in the comparativeperiod to 30 June 2004 was US$1.7 million after tax. The Group's effective tax rate during the first half of 2005 was 12.0 per cent(30 June 2004: 14.9 per cent). Management believes that this is indicative ofthe likely tax rate for the full year. Dividend The Board has declared an interim dividend of 9.9 US cents (5.4 pence) per share(30 June 2004: 7.9 US cents (4.3 pence)), an increase of 25 per cent. Thisdemonstrates management's confidence in the ongoing success of our business. Theinterim dividend will be paid on 14 November 2005 to shareholders of record atthe close of business on 14 October 2005. Segmental Information Commencing with the 2005 interim report, the Group has amended its segmentalreporting method to be aligned to the Group's multi-platform structure and inresponse to the current operational management and reporting framework. Whilstthe Group previously reported its non-Lloyd's business through the CorporateDirect and Corporate Reinsurance segments, this business is now divided into twonew segments - Catlin UK and Catlin Bermuda - to reflect the Group'sunderwriting platforms. Catlin UK primarily underwrites direct insurancebusiness; most of its business had previously been accounted for in theCorporate Direct Segment. Catlin Bermuda primarily writes reinsurance business,including intra-Group reinsurance; most of its business had previously beenaccounted for in the Corporate Reinsurance Segment. Comparative figures are presented on the new segmental reporting basis. Thechanges have no effect on the Catlin Syndicate Direct and Catlin SyndicateReinsurance segments. Six months ended 30 June 2005 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Intra Direct Reinsurance Bermuda UK Group Total ------- -------- -------- -------- -------- --------Gross 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 - 658,695Change inunearnedpremiums 88,116 (4,110) (127,857) 12,242 - (31,609) ------- -------- -------- -------- -------- --------Net premiumsearned 282,136 95,419 156,018 93,513 - 627,086Losses andloss expenses (134,607) (38,729) (78,414) (53,523) - (305,273)Policyacquisitioncosts (93,092) (31,141) (25,010) (19,340) 9,035 (159,548)Administrativeexpenses (18,432) (6,234) (10,193) (6,109) - (40,968)Other expenses (1,284) (434) (710) (426) (9,035) (11,889) ------- -------- -------- -------- -------- --------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% Six months ended 30 June 2004 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Intra Direct Reinsurance Bermuda UK Group Total ------- -------- -------- -------- -------- --------Gross premiumswritten 557,725 180,561 172,146 83,620 (58,752) 935,300Reinsurancepremiums ceded (149,539) (22,527) (5,013) (21,631) 58,752 (139,958) -------- -------- -------- -------- -------- --------Net premiumswritten 408,186 158,034 167,133 61,989 - 795,342Change inunearnedpremiums (84,228) (71,494) (42,786) (48,604) (247,112) -------- -------- -------- -------- -------- --------Net premiumsearned 323,958 86,540 124,347 13,385 - 548,230Losses andloss expenses (166,503) (29,448) (60,635) (9,518) - (266,104)Policyacquisitioncosts (105,452) (21,012) (17,953) (5,874) 7,433 (142,858)Administrativeexpenses (16,728) (4,469) (6,421) (691) - (28,309)Other expenses (4,662) (1,245) (1,789) (193) (7,433) (15,322) -------- -------- -------- -------- -------- --------Netunderwritingresult 30,613 30,366 37,549 (2,891) - 95,637 -------- -------- -------- -------- -------- -------- Loss ratio 51.4% 34.0% 48.8% 71.1% 48.5%Expense 38.4% 30.2% 20.3% 49.8% 33.3%ratioCombined ratio 89.8% 64.2% 69.1% 120.9% 81.8% Overview of Results and Operations All four business segments contributed to the Group's excellent performance,with an increasing portion of Catlin's business underwritten outside the Group'straditional Lloyd's base. During the six months ended 30 June 2005, CatlinBermuda and Catlin UK accounted for 51 per cent of the Group's gross premiumswritten after intra-Group reinsurance (30 June 2004: 27 per cent). Businessoriginated by the Catlin Syndicate amounted to 73 per cent of gross premiumswritten (30 June 2004: 79 per cent), while business written by the corporateplatforms - Catlin Bermuda and Catlin UK - amounted to 27 per cent (30 June2004: 21 per cent). The decrease in gross premiums written on a Group-wide basis was the result ofseveral factors. Premium rates for many classes of business decreased during theperiod, and in many cases we declined to underwrite business at a rate that wedid not believe was wholly adequate for the risk. In several key areas of theGroup's portfolio, sizeable reductions in exposure were implemented. During thesix months ended 30 June 2005, weighted average premium rates across all classesof business underwritten by Catlin decreased by 2 per cent, compared with a 2per cent increase during the comparable period of 2004. One of the Group's coreprinciples is to maintain underwriting discipline at all times, and we arepleased with our performance in the first half of 2005. As a result of thisdiscipline, rate adequacy across Catlin's book of business remained robustduring the period. A portion of the decrease in gross premiums written is attributable to timingdifferences and changes in our portfolio as capital is allocated to businessclasses which offer the best potential for return. Some business that wasunderwritten in the first half of 2004 is not expected to be renewed until thesecond half of 2005. As a result, we expect that the percentage decrease ingross premiums written for the full year 2005 will not be as great as for thesix month period to 30 June. The strengthening of the US dollar against sterlingduring the period also contributed to the reduction in gross premiums writtenwhen sterling denominated premiums underwritten by the Catlin Syndicate andCatlin UK were converted to US dollars. The decrease in gross written premiums was most pronounced in the CatlinSyndicate Direct segment, where volume fell by 32.0 per cent to US$379.0million. Part of the decrease was due to increasingly competitive marketconditions in certain classes of business, including large US property accountsand energy risks. In these cases, our underwriters chose not to write businessfor which premiums were not considered adequate. Also contributing to thedecreased volume in this segment was the fact that business that had previouslybeen underwritten by the Catlin Syndicate was underwritten by Catlin UK duringthe first six months of 2005. In March 2005, the Group received approval from the UK Financial ServicesAuthority to establish Catlin Insurance Company (UK) Ltd as a wholly ownedsubsidiary of Catlin Insurance Company Ltd. of Catlin Bermuda. Catlin UK wasformerly organised as Catlin Bermuda's UK branch office. As a UK domiciled andFSA regulated company, Catlin UK is permitted to underwrite business from anymember country of the European Economic Area ('EEA'). Business previouslyunderwritten by the UK branch has been transferred to the new company through acourt approved novation. Gross premiums written by Catlin UK, which beganunderwriting in January 2004, increased by 37.8 percent during the period. Thisdisciplined growth reflects new casualty and professional indemnity businesswritten for UK clients as well as the business formerly underwritten by theCatlin Syndicate that has been transferred to Catlin UK. The Catlin Syndicate Reinsurance segment reported a 4.0 per cent increase ingross premiums written, largely driven by an increase in demand for marineexcess of loss reinsurance following the hurricanes in the second half of 2004. Gross premiums written by Catlin Bermuda increased by 68.7 per cent, largelyreflecting the increase in the amount of intra-Group reinsurance ceded by othersegments to Catlin Bermuda. Before the effects of intra-Group reinsurance,Catlin Bermuda's gross premiums written decreased by about 12 per cent, arisingfrom the withdrawal from the medical expenses class of business. Volume inCatlin Bermuda's two largest classes of business, property catastrophereinsurance and casualty treaty reinsurance, both increased. Loss experience throughout the Group was favourable during the period, asreflected by the loss ratio of 48.7 per cent (30 June 2004: 48.5 per cent)during a period in which weighted average premium rates decreased. The loss, expense and combined ratios for each segment in the table above arereported after allowing for the effect of intra-Group reinsurance and thereforedo not reflect the ratios pertaining to the business as underwritten in thesegments prior to intra-Group transactions. The gross premiums written and theloss, expense and combined ratios for the segments, excluding the effect ofintra-Group reinsurance, are as follows: Six months ended 30 June 2005 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Direct Reinsurance Bermuda UK Total -------- -------- -------- -------- --------Gross 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% 29.9% 33.6%Combined ratio 88.7% 74.4% 59.5% 87.4% 82.3% Six months ended 30 June 2004 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Direct Reinsurance Bermuda UK Total -------- -------- -------- -------- --------Gross premiums written 557,725 180,561 113,394 83,620 935,300 Loss ratio 52.6% 34.9% 37.2% 71.1% 48.5%Expense ratio 34.4% 27.7% 31.3% 51.1% 33.3%Combined ratio 87.0% 62.6% 68.5% 122.2% 81.8% The Group's operating infrastructure - which includes three underwritingplatforms (the Catlin Syndicate, Catlin Bermuda and Catlin UK) supported by anetwork of international offices - continues to perform well, giving the Groupadvantages not shared by its competitors. Our operating structure is extremelyflexible, allowing us to expand quickly in areas where we see profitableopportunities. The Group has reached an agreement in principle to acquire a shell insurancecompany, which is an admitted insurer in 27 US states. Upon completion andregulatory approval, the company will be renamed Catlin Insurance Company Inc('Catlin US') and will become the Group's fourth underwriting platform. CatlinUS will write speciality classes of property/casualty insurance for UScommercial clients that require coverage written by an admitted insurer. The admitted specialty classes of business to be written by Catlin US willrepresent a new source of business for the Group, although the business to beunderwritten will be consistent with Catlin's existing book of US surplus linesbusiness underwritten by the Catlin Syndicate and Catlin Bermuda. We believethat the creation of Catlin US will enhance the Group's current relationships inthe United States. The Group is currently recruiting staff for Catlin US, and itis envisioned that the company could begin underwriting with effect from 1January 2006, subject to regulatory approvals. The establishment of Catlin USwill therefore have little impact on the Group's 2005 results. Catlin also continued to strengthen its network of international offices during2005 with the establishment of three new offices. Catlin Belgium in Antwerpspecialises in underwriting cargo and other specialist classes of insurance.Catlin Canada in Toronto underwrites property and casualty, construction,engineering, marine and aviation coverage for Canadian policyholders. CatlinGuernsey underwrites general aviation business. All three offices are expectedto write modest amounts of quality business on behalf of the Catlin Syndicateduring the second half of 2005, with volumes increasing in subsequent years. Thenew offices build upon the existing Catlin network of international offices inthe United States (Houston and New Orleans), Germany (Cologne), Singapore,Malaysia (Kuala Lumpur) and Australia (Sydney). These offices allow the Group towork more closely with retail brokers and their clients, which is a stated goalof the Group. IFRS The Group continues to prepare its accounts in accordance with US GAAP. In orderto facilitate comparison with UK-based companies which now prepare theiraccounts in accordance with IFRS, the Group has included a reconciliation of netincome and stockholders' equity from US GAAP to IFRS in the notes to theconsolidated financial statements. This reconciliation replaces the US GAAP toUK GAAP reconciliation which the Group has presented in prior reporting periods.If the Group prepared its accounts in accordance with IFRS, net income at 30June 2005 would have been increased by approximately $11 million, or 10 percent, and the corresponding annualised return on average equity would have been24.3 per cent. Outlook In a risk business circumstances can change very quickly as vividly shown byHurricane Katrina, which may be the largest insured loss in history. At thisstage it is difficult to anticipate either the outcome of the loss or thereaction to the loss by the market. However, we would expect a firming in ratesin many classes of business. Other than Hurricane Katrina, 2005 to date has beena relatively benign loss year. It remains to be seen whether or not weexperience further hurricane activity or other major loss activity in ourportfolio. Our current expectation is for the underlying portfolio to remainvery profitable. We believe that Catlin is well positioned to continue to deliver superiorreturns to shareholders. Rates across our book of business are strong, and webelieve they will remain strong for the foreseeable future. The underwritingdiscipline which Catlin displayed during the first six months of 2005underscores our commitment to underwriting profitability over the long term. Webelieve this discipline, combined with the additions to our operating structuremade so far this year, will result in profitable underwriting opportunities inthe years to come. Stephen CatlinChief Executive9 September 2005 Catlin Group LimitedConsolidated Balance SheetsAs at 30 June 2005 and 2004 and 31 December 2004(US dollars in thousands, except share amounts) 30 June 30 June 31 December 2005 2004 2004 (unaudited) (unaudited) (audited) --------- --------- ---------AssetsInvestmentsFixed maturities, available-for-sale(amortised cost: 2005:$1,525,917; June 2004: $1,080,859; Dec 2004: $1,441,014) $1,531,650 $1,079,129 $1,452,198Short-term investments 60,596 52,701 173,037Cash and cash equivalents 624,243 579,261 354,608Investment in associate 2,520 2,361 2,869 --------- --------- ---------Total investments 2,219,009 1,713,452 1,982,712 --------- --------- --------- Accrued investment income 13,989 10,408 15,925Premiums and other receivables 628,255 720,518 629,544Reinsurance recoverable (net ofallowance of 2005: $18,303; June 2004:$15,632; Dec 2004: $18,864) 338,072 255,680 390,945Deposit with reinsurer 21,823 60,606 57,830Reinsurers' share of unearned premiums 88,890 96,252 51,748Deferred acquisition costs 143,025 185,618 142,511Intangible assets and goodwill(accumulated amortisation 2005:$27,210; June 2004: $25,266; Dec 2004:$29,163) 66,032 69,374 71,238Other assets 48,853 81,400 30,673 --------- --------- ---------Total assets $3,567,948 $3,193,308 $3,373,126 --------- --------- --------- Liabilities and stockholders' equityLiabilities:Unpaid losses and loss expenses $1,482,400 $1,085,491 $1,472,819Unearned premiums 776,393 914,015 722,891Deferred gain 8,124 19,418 19,548Reinsurance payable 109,851 113,148 59,137Notes payable 50,250 50,359 50,187Accounts payable and other liabilities 61,297 90,919 70,138Deferred taxes 22,246 6,707 7,219 --------- --------- ---------Total liabilities $2,510,561 $2,280,057 $2,401,939 --------- --------- --------- The accompanying notes are an integral part of the consolidated financial statements. 30 June 30 June 31 December 2005 2004 2004 (unaudited) (unaudited) (audited) --------- --------- ---------Stockholders' equity:Ordinary common shares, par value $0.01Authorised 250,000,000; issued andoutstanding 2005: 155,843,070; June2004: 154,071,925; Dec 2004:154,097,989) $1,558 $1,541 $1,541 Additional paid-in capital 719,075 715,167 716,649Accumulated other comprehensiveincome/(loss) 565 (6,012) 4,156Retained earnings 336,189 202,555 248,841 --------- --------- ---------Total stockholders' equity 1,057,387 913,251 971,187 --------- --------- ---------Total liabilities and stockholders'equity $3,567,948 $3,193,308 $3,373,126 --------- --------- --------- Approved by the Board of Directors on 9 September 2005 The accompanying notes are an integral part of the consolidated financial statements. Catlin Group LimitedConsolidated Statements of Operations (unaudited)For the Six Months Ended 30 June 2005 and 2004(US dollars in thousands, except share amounts) 2005 2004 -------- --------RevenuesGross premiums written $781,739 $935,300Reinsurance premiums ceded (123,044) (139,958) -------- --------Net premiums written 658,695 795,342Change in unearned premiums (31,609) (247,112) -------- --------Net premiums earned 627,086 548,230 -------- --------Net investment income 36,849 18,867Net realised gains on investments 1,339 1,223Net realised (losses) on foreign currency exchange (21,545) (3,160)Other income 284 60 -------- --------Total revenues 644,013 565,220 -------- -------- ExpensesLosses and loss expenses 305,273 266,104Policy acquisition costs 159,548 142,858Administrative expenses 40,968 28,309Other expenses 11,889 15,322 -------- --------Total expenses 517,678 452,593 -------- --------Income before income tax expense 126,335 112,627Income tax expense (15,160) (16,781) -------- --------Net income $111,175 $95,846 -------- -------- Earnings per common shareBasic $0.72 $1.19Diluted $0.66 $0.65 The accompanying notes are an integral part of the consolidated financial statements. Catlin Group LimitedConsolidated Statements of Changes in Stockholders' Equityand Accumulated Other Comprehensive Income (unaudited)For the Six Months Ended 30 June 2005 and 2004(US dollars in thousands, except share amounts) Accumulated Additional other Total Common Preference paid-in Retained comprehensive stockholders' stock shares capital earnings income (loss) equity ------- ------- -------- -------- --------- ---------Balance 1January 2004 $8 $50 $533,276 $106,709 $(1,406) $638,637Comprehensiveincome:Net income - - - 95,846 - 95,846Othercomprehensiveloss - - - - (4,606) (4,606) ------- ------- -------- -------- --------- ---------Totalcomprehensiveincome - - - 95,846 (4,606) 91,240 ------- ------- -------- -------- --------- --------- Payment ofPIK 4 - (4) - - -dividendRedesignationof preferenceshares 50 (50) - - - -19-1 bonusissue 1,167 - (1,167) - - -Global 312 - 182,092 - - 182,404offerStockcompensationexpense - - 970 - - 970 ------- ------- -------- -------- --------- ---------Balance 30June 2004 $1,541 - $715,167 $202,555 $(6,012) $913,251 ------- ------- -------- -------- --------- --------- Balance 1January 2005 $1,541 $- $716,649 $248,841 $4,156 $971,187Comprehensiveincome:Net income - - - 111,175 - 111,175Othercomprehensiveincome - - - - (3,591) (3,591) ------- ------- -------- -------- --------- ---------Totalcomprehensiveincome - - - 111,175 (3,591) 107,584 ------- ------- -------- -------- --------- --------- Stockcompensationexpense - - 2,096 - - 2,096Stock optionsand warrantsexercised 17 - (17) - - -Dividends - - - (23,480) - (23,480)paidDeferredcompensationobligation - - 347 (347) - - ------- ------- -------- -------- --------- ---------Balance 30June 2005 $1,558 $- $719,075 $336,189 $565 $1,057,387 ------- ------- -------- -------- --------- --------- The accompanying notes are an integral part of the consolidated financial statements. Catlin Group LimitedConsolidated Statements of Cash Flows (unaudited)For the Six Months Ended 30 June 2005 and 2004(US dollars in thousands, except share amounts) 2005 2004 --------- ---------Cash flows provided by operating activitiesNet income $111,175 $95,846Adjustments to reconcile net income to net cash providedby operations:Amortisation and depreciation 4,949 5,126Amortisation of discounts of fixed maturities (4,708) (955)Net realised (gains) on investments (1,339) (1,224)Unpaid losses and loss expenses 109,569 112,902Unearned premiums 100,937 296,655Premiums and other receivables (46,761) (251,791)Deferred acquisition costs (9,119) (54,290)Reinsurance payable 104,449 65,970Reinsurance recoverable 9,145 35,977Reinsurers' share of unearned premiums (58,081) (52,591)Deposit with reinsurer 36,008 33,864Deferred gain (11,844) (10,811)Accounts payable and other liabilities (5,184) 35,210Deferred tax 15,150 3,048Other (51,809) (14,953) --------- ---------Net cash flows provided by operating activities 302,537 297,983 --------- --------- Cash flows used in investing activitiesPurchases of fixed maturities (951,914) (601,327)Purchases of short-term investments (190,115) (494,193)Proceeds from sales of fixed maturities 806,985 247,606Proceeds from maturities of fixed maturities 50,487 26,346Proceeds from sales of short-term investments 311,798 600,118Purchase of intangible assets - (346)Purchases of property and equipment (3,841) (6,893)Proceeds from sales of property and equipment 6 1 --------- ---------Net cash flows provided by/(used in) investingactivities 23,406 (228,688) --------- --------- The accompanying notes are an integral part of the consolidated financialstatements. Catlin Group LimitedConsolidated Statements of Cash Flows (unaudited)For the Six Months Ended 30 June 2005 and 2004(US dollars in thousands, except share amounts) 2005 2004 --------- ---------Cash flows provided by financing activitiesProceeds from issue of common shares $- $182,404Dividends paid on common shares (23,425) -Proceeds from exercise of stock options - -Proceeds from notes payable 100 100Repayment of notes payable (100) (100)Proceeds from short-term debt - 552Repayment of short-term debt - (119) --------- ---------Net cash flows (used in)/provided by financingactivities (23,425) 182,837 --------- ---------Net increase in cash and cash equivalents 302,518 252,132Cash and cash equivalents - beginning of period 354,608 325,667Effect of exchange rate changes (32,883) 1,462 --------- ---------Cash and cash equivalents - end of period $624,243 $579,261 --------- --------- Supplemental cash flow informationTaxes paid $3 $105 --------- ---------Interest paid $702 $298 --------- --------- Cash and cash equivalents comprise the following:Cash at bank and in hand $615,656 $568,067 --------- ---------Cash equivalents $8,587 $11,194 --------- --------- The accompanying notes are an integral part of the consolidated financialstatements. Catlin Group LimitedNotes to the Consolidated Financial Statements (unaudited)For the Six Months Ended 30 June 2005 and 2004(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 2004. During the first half of 2005, the Group reassessed its estimate of the usefullife of syndicate capacity purchased during 2002 and determined that it wasindefinite. As a result, the Group has ceased amortising this intangible assetand instead it will be tested at least annually for impairment. This change inaccounting estimate will be applied prospectively. The effect of this change in accounting estimate on current periodadministrative expenses, income before income tax expense and net income, aswell as on basic and diluted earnings per share, is presented below. Before change Effect of change in accounting in accounting estimate estimate As reported --------- --------- ---------Administrative expenses $42,882 $(1,914) $40,968 Income before income tax expense 124,421 1,914 126,335Income tax expense (14,929) (231) (15,160) --------- --------- ---------Net income $109,492 $1,683 $111,175 --------- --------- --------- Earnings per common shareBasic $0.71 $0.01 $0.72Diluted $0.65 $0.01 $0.66 2 Segmental information Beginning with this 2005 Interim Statement, the Group has adjusted its segmentalreporting method to respond to changes in the operational management andreporting of the Group. The Group will now report four segments aligned to itsthree operating platforms as follows: Catlin Syndicate Direct, Catlin SyndicateReinsurance, Catlin UK and Catlin Bermuda. The former segments Lloyd's Directand Lloyd's Reinsurance have been renamed as Catlin Syndicate Direct and CatlinSyndicate Reinsurance, respectively. The former segments Corporate Direct andCorporate Reinsurance were each a combination of business written by Catlin UKand Catlin Bermuda. Comparative segmental information for the six months ended30 June 2004 has been reclassified to conform to this new presentation. For the six months ended 30 June 2005 and 2004, these segments correspond to thelocation of where the business was written, with Catlin Syndicate Direct, CatlinSyndicate Reinsurance and Catlin UK business being written in the UK and CatlinBermuda business being written in Bermuda. 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 Direct Reinsurance Bermuda UK Intra-Group Total ------ -------- -------- -------- -------- --------Gross 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)Policyacquisitioncosts (93,092) (31,141) (25,010) (19,340) 9,035 (159,548)Administrativeexpenses (18,432) (6,234) (10,193) (6,109) - (40,968)Other expenses (1,284) (434) (710) (426) (9,035) (11,889) ------ -------- -------- -------- -------- --------Netunderwritingresult 34,721 18,881 41,691 14,115 - 109,408 ------ -------- -------- -------- -------- --------Net investmentincome and netrealised gainson investments 17,181 5,811 9,501 5,695 - 38,188Net realisedlosses onforeigncurrencyexchange (9,694) (3,278) (5,360) (3,213) - (21,545)Other income 128 43 71 42 - 284 ------ -------- -------- -------- -------- --------Income beforeincome taxexpense $42,336 $21,457 $45,903 $16,639 $- $126,335 ------ -------- -------- -------- -------- --------Total $289,751 $97,995 $160,230 $96,037 $- $644,013revenue ------ -------- -------- -------- -------- -------- Net income before tax by operating segment before intra-Group reinsuranceeliminations for the six months ended 30 June 2004 is as follows: Catlin Catlin Syndicate Syndicate Catlin Direct Reinsurance Bermuda Catlin UK Intra-Group Total ------ -------- -------- -------- -------- --------Gross premiumswritten $557,725 $180,561 $172,146 $83,620 $(58,752) $935,300Reinsurancepremiums ceded (149,539) (22,527) (5,013) (21,631) 58,752 (139,958) ------ -------- -------- -------- -------- --------Net premiumswritten 408,186 158,034 167,133 61,989 - 795,342 ------ -------- -------- -------- -------- --------Net premiumsearned 323,958 86,540 124,347 13,385 - 548,230Losses andloss expenses (166,503) (29,448) (60,635) (9,518) - (266,104)Policyacquisitioncosts (105,452) (21,012) (17,953) (5,874) 7,433 (142,858)Administrative expenses (16,728) (4,469) (6,421) (691) - (28,309)Other expenses (4,662) (1,245) (1,789) (193) (7,433) (15,322) ------ -------- -------- -------- -------- --------Netunderwritingresult 30,613 30,366 37,549 (2,891) - 95,637 ------ -------- -------- -------- -------- --------Net investmentincome and netrealised gainson investments 11,871 3,171 4,556 492 - 20,090Net realisedlosses onforeigncurrencyexchange (1,867) (499) (717) (77) - (3,160)Other income 35 9 14 2 - 60 ------ -------- -------- -------- -------- --------Income beforeincome taxexpense $40,652 $33,047 $41,402 $(2,474) $- $112,627 ------ -------- -------- -------- -------- --------Total $333,997 $89,221 $128,200 $13,802 $- $565,220revenue ------ -------- -------- -------- -------- -------- Total revenue is the total of net premiums written, net investment income andnet realised gain/(loss) on investments, net realised gain/(loss) on foreigncurrency exchange, and other income. Total assets by segment as at 30 June 2005 and 2004 are as follows: 2005 2004 ----------- -----------Catlin Syndicate Direct $2,004,628 $1,848,334Catlin Syndicate Reinsurance 667,666 443,172Catlin Bermuda 1,636,097 1,269,719Catlin UK 505,641 203,035Other 837,062 866,949Consolidation adjustments (2,083,146) (1,437,901) ----------- -----------Total assets $3,567,948 $3,193,308 ----------- ----------- '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 2005 and 2004are as follows: 2005 2004 Fair Amortised Fair Amortised value cost value cost --------- --------- --------- ---------US government and agencies $765,592 $757,448 $511,466 $510,603Non-US governments 201,094 200,375 41,412 41,538Corporate securities 304,025 306,355 273,679 275,397Asset-backed securities 260,939 261,739 252,572 253,321 --------- --------- --------- ---------Total fixed maturities $1,531,650 $1,525,917 $1,079,129 $1,080,859 --------- --------- --------- --------- The gross unrealised gains and losses related to fixed maturities at 30 June2005 and 2004 are as follows: 2005 2004 Gross Gross Gross Gross unrealised unrealised unrealised unrealised gains losses gains losses --------- --------- --------- ---------US government and agencies $9,427 $1,283 $2,970 $2,107Non-US governments 1,472 753 16 142Corporate securities 239 2,569 224 1,942Asset-backed securities 202 1,002 129 878 --------- --------- --------- ---------Total fixed maturities $11,340 $5,607 $3,339 $5,069 --------- --------- --------- --------- There were no other than temporary declines in the value of investments in thesix months to 30 June 2005 or 2004. The net realised gains on fixed maturitiesfor the six months ended 30 June 2005 were $1,254 (2004: $1,116). Fixed maturities at 30 June 2005, 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 value Amortised cost ----------- -----------Due in one year $74,519 $74,944Due after one through five years 728,232 730,217Due after five through ten years 418,938 410,812Due after 10 years 49,022 48,205 ----------- ----------- 1,270,711 1,264,178Asset backed securities 260,939 261,739 ----------- -----------Total $1,531,650 $1,525,917 ----------- ----------- Restricted assets The 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 2005 and 2004are as follows: 2005 2004 ----------- -----------Fixed maturities, available for sale $635,010 $445,409Short term investments 21,127 37,102Cash and cash equivalents 136,231 126,462 ----------- -----------Total restricted assets $792,368 $608,973 ----------- ----------- 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 continues to be a complex process dealing withuncertainty, and requires the use of informed estimates and judgments. TheGroup's estimates and judgments may be revised as additional experience andother data become available and are reviewed, as new or improved methodologiesare developed or as current laws change. Any such revisions could result infuture changes in estimates of losses or reinsurance recoverable, and would bereflected in the Group's results of operations in the period in which theestimates are changed. Management believes they have made a reasonable estimateof the level of reserves at 30 June 2005 and 2004. The reconciliation of unpaid losses and loss expenses for the six months ended30 June 2005 and 2004 is as follows: 2005 2004 ----------- -----------Gross unpaid losses and loss expenses, beginning ofperiod $1,472,819 $962,535Reinsurance recoverable on unpaid loss and lossexpenses (359,154) (242,187) ----------- -----------Net unpaid losses and loss expenses, beginning ofperiod 1,113,665 720,348 ----------- -----------Net incurred losses and loss expenses for claimsrelated to:Current year 308,839 281,934Prior years (3,566) (15,830) ----------- -----------Total incurred losses and loss expenses 305,273 266,104 ----------- -----------Net paid losses and loss expenses for claims relatedto:Current year (11,719) (22,385)Prior year (167,723) (87,196) ----------- -----------Total paid losses and loss expenses (179,442) (109,581) ----------- -----------Foreign exchange adjustment (46,110) 5,043Net unpaid losses and loss expenses, end of period 1,193,386 881,914Reinsurance recoverable on unpaid loss and lossexpenses 289,014 203,577 ----------- -----------Gross unpaid losses and loss expenses, end of period $1,482,400 $1,085,491 ----------- ----------- As a result of the changes in estimates of insured events in prior years, theprovision at 30 June 2005 for losses and loss expenses net of reinsurancerecoveries decreased by $3,566 (2004: decrease of $15,830). 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: 2005 2004 Premiums Premiums Premiums Premiums written earned written earned --------- --------- --------- ---------Direct $501,922 $502,152 $673,830 $481,925Assumed 279,817 203,219 261,470 147,705Ceded (123,044) (78,285) (139,958) (81,400) --------- --------- --------- ---------Net premiums $658,695 $627,086 $795,342 $548,230 --------- --------- --------- --------- The Group's provision for reinsurance recoverable as at 30 June 2005 and 2004 isas follows: 2005 2004 ----------- -----------Gross reinsurance recoverable $356,375 $271,312Provisions for uncollectible balances (18,303) (15,632) ----------- -----------Net reinsurance recoverable $338,072 $255,680 ----------- ----------- The Group holds collateral against certain reinsurance recoverable positions,including deposit with reinsurer, totalling $27,978 (2004: $60,606). 6 Notes payable, debt and financing arrangements In November 2004, the Group entered into a Letter of Credit/Revolving LoanFacility (the 'Club Facility'), consisting of three tranches. The following wasoutstanding under the Club Facility as at 30 June 2005 under each of the threetranches: • Debt outstanding was $50 million, in the form of a 364-day, $50 million revolving facility with a one year term-out option. This facility was reduced from $100 million to $50 million in August 2004. It represents an unsecured loan to Catlin Group Limited; however, the facility is secured by cross guarantees of material subsidiaries. This debt bears interest at three-month Libor plus 75 basis points, reduced from 85 basis points in November 2004, 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 the facility costs 35 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 convert all cash advances into a term loan with a final maturity date of no later than 18 November 2006. • As security for its underwriting, a clean, irrevocable standby LOC of $223,750 (£125,000) is available for utilisation. As at 30 June 2005, CSL has deposited with Lloyd's an LOC amounting to $209,520 (£117,050). In the event of the Group's failing to meet its obligations under policies of insurance written on its behalf, Lloyd's may draw down this letter of credit. This LOC became effective on 18 November 2004 and has an initial expiry date of 17 November 2008. In addition, Catlin UK benefits from the issuance of a LOC amounting to $1,908 (£1,066). Collateral of $51,015 (£28,500) must be provided by 1 August 2005 and a further $34,010 (£19,000) by 31 July 2006. • There are two Standby LOC facilities available for utilisation by Catlin Bermuda and Catlin UK, a two-year $50 million facility and a second one-year $50 million facility. At 30 June 2005, $30,059 in LOC's were outstanding, all of which are issued by Catlin Bermuda. Collateral of 110% of 50% of the face value of the utilised portion of the LOCs under both Standby facilities must be provided. 7 Taxation Under current Bermuda law, the Company and its Bermuda subsidiary, CatlinInsurance Company Ltd. ("CICL"), are not required to pay any taxes in Bermuda ontheir income or capital gains. The Company and CICL have received an undertakingfrom the Minister of Finance in Bermuda that, in the event of any taxes beingimposed, the Company and CICL will be exempt from taxation in Bermuda untilMarch 2016. The Group has two UK insurance platforms, Catlin UK and Catlin Syndicate, whichoperates at Lloyd's through Syndicate 2003; the income of both UK platforms issubject to UK corporation taxes. However, Catlin Syndicate, through Lloyd'sSyndicate 2003, is also subject to US income tax to US connected income. Under a closing agreement between Lloyd's and the US Internal Revenue Service(IRS), the amount of US tax due on US connected income is calculated by Lloyd'sand remitted directly to the IRS. These amounts are then charged to the personalaccounts of the Names and Corporate Members in proportion to their participationin the relevant Syndicates. The Group's Corporate Member is also subject to thisarrangement, but, as a UK domiciled company, will receive UK corporation taxcredits for any US income tax incurred up to the value of the equivalent UKcorporate income tax charge on the US income. The Group, through its US operations, is subject to income taxes imposed by USauthorities and is required to file US tax returns. Certain internationaloperations of the Group are also subject to income taxes imposed by thejurisdictions in which they operate. The Group is not subject to taxation other than as stated above. There can be noassurance that there will not be changes in applicable laws, regulations ortreaties, which might require the Group to change the way it operates or becomesubject to taxation. The income tax expense for the six months ended 30 June 2005 and 2004 is asfollows: 2005 2004 ----------- -----------Current tax expense $- $-Deferred tax expense 15,160 16,781 ----------- -----------Expense for income taxes $15,160 $16,781 ----------- ----------- 8 Stockholders' equity The following is a detail of the number and par value of common sharesauthorised, issued and outstanding as of 30 June 2005 and 2004: Authorised Issued and Outstanding Number Par Number Par of shares value of shares value (000) ($000) (000) ($000) ----------- ------ ----------- ------Ordinary common shares, par value$0.01 per shareAs at 30 June 2005 250,000 $2,500 155,843 $1,558As at 30 June 2004 250,000 $2,500 154,072 $1,541 The following table outlines the changes in common shares issued and outstandingduring the first six months of 2005 and 2004: 2005 2004 ------------ ------------Balance, 1 January 154,097,989 75,109,082Movements pre-IPO:Payment of payment-in-kind ('PIK') dividend - 42,195,965Redesignation of preference shares - 497,000,000Cancellation of options and replacement withordinary common shares - 154,576 ------------ ------------Total ordinary common shares before the effect ofboth the 19-1 bonus issue and the subsequent 100-1consolidation - 614,459,623 ------------ ------------Total ordinary common shares after effect of boththe 19-1 bonus issue and the subsequent 100-1consolidation - 122,891,925New ordinary common shares issued in the IPO - 31,180,000Ordinary common shares issued after the IPO(exercise of stock options and warrants) 1,745,081 - ------------ ------------Balance, 30 June 155,843,070 154,071,925 ------------ ------------ On 6 April 2004, the Group completed its IPO and was admitted to the officiallist of the London Stock Exchange plc. Immediately prior to admission, certainchanges to the Company's capital structure took place. Accrued dividends onconvertible preference shares were settled through the issuance of additionalcommon shares and a small number of share options were cancelled and replacedwith common shares. All convertible preference shares were then converted intocommon shares and were consolidated on a five-to-one basis, achieved through a19-to-1 bonus issuance and a 100-to-1 share consolidation. The Group raised $200,472 ($182,627 net of expenses) through the issuance of31,180,000 new shares. In addition, as part of the IPO, existing shareholderssold a further 23,380,000 shares. As a result, immediately following the capital changes and the IPO, the Companyhad 154,071,925 common shares issued and outstanding. To maintain economicequivalence, the warrants and stock options that were outstanding at the time ofthe IPO were also consolidated on a five-to-one basis and their exercise pricesincreased by a factor of five. On 31 May 2005, the Group paid a final dividend of $0.156 (£0.081) per share toshareholders of record at the close of business on 29 April 2005. The totaldividend paid for the 2004 financial year was $0.235 (£0.124) per share. 9 Earnings per share Basic earnings per share is calculated by dividing the net income attributableto common stockholders by the weighted average number of common shares in issueduring the period. Diluted earnings per share is calculated by dividing the net income attributableto all stockholders 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) Class A cumulative redeemable preference shares;(ii) Class B-1 cumulative redeemable preference shares;(iii) Class B-2 cumulative redeemable preference shares;(iv) Employee stock option plan; and(v) Warrants There is no difference between net income attributable to ordinary stockholdersand net income attributable to all stockholders for the six months ended 30 June2005 and 2004. Reconciliations of the number of shares as at 30 June 2005 and 2004 used in thecalculations are set out below. 2005 2004 Number Number ------------ ------------Weighted average number of shares 154,116,555 80,676,699Dilution effect of warrants 4,125,308 4,700,181Dilution effect of stock options 3,900,578 1,473,913Dilution effect of options and warrants exercisedin the period 5,196,711 -Dilution effect of convertible participatingpreference shares - 58,346,667Dilution effect of accrued dividends onconvertible participating preference shares to bepaid in common stock - 3,122,019 ------------ ------------Weighted average number of shares on a dilutedbasis 167,339,152 148,319,479 ------------ ------------ Diluted earnings per share in the Group's Interim Statement 2004 did not takeinto account the dilution effects of convertible participating preference sharesand accrued dividends on convertible participating preference shares to be paidin common stock, both of which were converted to common stock at the time of theIPO. Diluted earnings per share for the half year ended 30 June 2004, restatedfor these dilution effects, is $0.65 (as previously reported: $1.10). 10 Employee stock compensation scheme On 1 February 2005, the Board approved the form of a Performance Share Plan('PSP'), and on 11 March 2005, the first awards were made to employees. A totalof 2,056,977 options with a nil exercise price and 166,982 non-vested shares(total of 2,223,959 securities) were granted to Group employees. Half of thesecurities vest on 11 March 2008 and the other half vest on 11 March 2009,subject to certain performance conditions calibrated to stockholder returns. These securities have been treated as non-vested shares and as such have beenmeasured at their fair value as if they were vested and issued on the grantdate. The resulting fair value amount will then be charged as compensationexpense over the relevant vesting period. In addition, at each dividend payment date, an amount equal to the dividend thatwould be payable in respect of the shares to be issued under the PSP, is to bepaid into an Employee Benefit Trust. This amount, totalling $347 in the firstsix months of 2005, is treated as a deferred compensation obligation and as suchis taken directly to retained earnings and capitalised in stockholders' equitywithin additional paid-in capital. The PSP is a new plan in addition to the employee stock option plan described inthe Group's consolidated financial statements for the year ended 31 December2004. These financial statements include the total cost of stock compensationfor both plans, calculated using the fair value method of accounting forstock-based employee compensation. The total cost of the plans expensed in thesix months ended 30 June 2005 was $2,096 (2004: $970). 11 Subsequent events Hurricane KatrinaOn 29 August 2005, Hurricane Katrina struck the southern US states, causingsignificant damage particularly in Louisiana, Mississippi and Alabama. There ismaterial uncertainty as to the total insured loss and the resultant loss to theGroup. The Group's provisional estimate of its total gross loss is approximately$275 million, or $125 million net of reinsurance and net reinstatement costs. CollateralOn 1 August 2005, the Group provided collateral of $51,015 (£28,500) against itsclean, irrevocable standby LOC of $223,750 (£125,000) as described in Note 6. 12 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. The Group's peers have adopted IFRS as their primary reporting basis, beginningwith Interim 2005 reporting. As a result, this is the first period that areconciliation to IFRS has been included in the Group's consolidated financialstatements; in previous periods, a reconciliation to UK GAAP was presented. This reconciliation has been prepared in accordance with IFRS as at 31 December2004, which are the standards expected to be in place as at 31 December 2005.This information may require adjustment before 31 December 2005. A large numberof current Standards have recently been issued or revised and therefore aresubject to interpretation issued by the International Financial ReportingInterpretations Committee. In addition, further standards may be issued by theInternational Accounting Standards Board that will be effective for periodsbeginning 1 January 2005. Finally, current IFRS is currently being applied forthe first time and therefore interpretation and application continues to evolve. Net Income Six months ended June 30 Note 2005 2004 ----- ---------- ---------Net income under US GAAP $111,175 $95,846Adjustment for:Change to single functional currency (a) 4,710 -Exchange gains/(losses) on foreign currencybond (b) 11,787 (1,554)portfoliosFair value of employee stock compensation (c) (49) (49)Taxation (d) (5,042) 373 ----- ---------- ---------Net income under IFRS $122,581 $94,616 ----- ---------- --------- Stockholders' equity As at 30 June Note 2005 2004 ----- ---------- ---------Stockholders' equity under US GAAP $1,057,387 $913,251Adjustment for:Change to single functional currency (a) (7,442) -Fair value of employee stock compensation (c) (241) (120) ----- ---------- ---------Stockholders' equity under IFRS $1,049,704 $913,131 ----- ---------- --------- a) Under US GAAP, an entity is permitted to have more than one functionalcurrency, if certain criteria are met. Catlin Syndicate meets these criteria andtherefore operates with four functional currencies. Under IFRS, the revised IAS21 became effective on 1 January 2005. Although multiple functional currencieswere allowed under the former IAS 21, the revised standard prohibits multiplefunctional currencies within an entity. The new IAS 21 has been appliedprospectively, and this reconciling item shows the net effect of moving CatlinSyndicate from four functional currencies to sterling as the sole functionalcurrency. 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 compensationscheme when the Company is privately-held may be valued assuming no expectedvolatility (the minimum value method). Under IFRS, a volatility assumption mustbe made in valuing stock-based compensation issued after 7 November 2002, evenif the Company is privately-held. This reconciling item represents the fairvalue of employee stock options issued after 7 November 2002, recalculated withan expected volatility assumption reflecting the historical volatility of theGroup's listed peers. d) All of the reconciling items are presented before tax. This line itemrepresents the tax effect of all the reconciling items. Independent Review Report to Catlin Group Limited Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2005 which comprises the consolidated interimbalance sheet as at 30 June 2005 and the related consolidated statements ofoperations, consolidated statements of changes in stockholders' equity andaccumulated other comprehensive income, consolidated statements of cash flowsand related notes. This financial information is prepared in conformity withaccounting principles generally accepted in the United States of America. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority, which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed.Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of management and applying analyticalprocedures to the financial information and underlying financial data and, basedthereon, assessing whether the disclosed accounting policies have been applied.A review excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit and therefore provides a lower level of assurance. Accordingly we do notexpress an audit opinion on the financial information. This report, includingthe conclusion, has been prepared for and only for the company for the purposeof the Listing Rules of the Financial Services Authority and for no otherpurpose. We do not, in producing this report, accept or assume responsibilityfor any other purpose or to any other person to whom this report is shown orinto whose hands it may come save where expressly agreed by our prior consent inwriting. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005 for them to be in conformity with accounting principlesgenerally accepted in the United States of America. PricewaterhouseCoopersChartered AccountantsBermuda9 September 2005 Notes: (a) The maintenance and integrity of the Catlin Group Limited web site isthe responsibility of the directors; the work carried out by the auditors doesnot involve consideration of these matters and, accordingly, the auditors acceptno responsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site.(b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. This information is provided by RNS The company news service from the London Stock Exchange