Castelnau Group Regulatory News (CGL)

6 Sep 2007 07:01

Catlin Group Limited06 September 2007 FOR IMMEDIATE RELEASE 6 September 2007 Release 2007-16 CATLIN GROUP ANNOUNCES INTERIM RESULTS FOR PERIOD ENDED 30 JUNE 2007 HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), theinternational property and casualty insurer and reinsurer, announces itsfinancial results for the six months ended 30 June 2007. Highlights: • Income before tax of US$190 million after acquisition effects; net income of US$162 million • Accelerating financial benefits from acquisition in second half of 2007 • Group on track to meet 2007 financial expectations • Gross premium written of US$2.0 billion; 29 per cent increase on H1 2006 (combined Catlin 'as reported' and Wellington on US GAAP basis) • 41 per cent increase in unearned premiums during first half to US$1.8 billion • 34 per cent increase in stockholders' equity during first half to US$2.7 billion • Integration of Wellington operations completed with virtually no business loss as result of acquisition • Operating and tax synergies resulting from acquisition greater than expected, post-tax synergy expectation for 2008 increased to at least US$100 million • Interim dividend of 8.1 pence (16.4 US cents) per share (30 June 2006: 6.0 pence or 11.3 US cents) • Further embedded growth benefits will be seen in 2008 Commenting on the Group's interim results, Chief Executive Stephen Catlin said: "I am very pleased with the Catlin Group's performance during the first half of2007. Our retention of business following the Wellington acquisition has beenexcellent, and we have continued to build our business for the future throughthe recruitment of new underwriting teams and the continued development ofCatlin US and our international offices. "First-half profits were reduced by residual interests of Wellington's formerthird-party capital providers and by integration costs. These effects willdecline in future periods and the financial benefits of the transaction willgrow. Catlin is on track to meet its financial targets for 2007. In 2008, wewill benefit from further embedded growth arising from the acquisition as wellas at least US$100 million in synergy savings." US$000 30 June 2007 30 June 2006 30 June 2006 combined(1) Catlin as reportedGross premiums written 1,997,507 1,552,904 903,145Net premiums written 1,445,671 1,235,915 765,993Net premiums earned 1,192,212 1,050,152 642,483Income before income tax expense 190,249 228,035 167,399Net income 161,720 186,918 147,310Loss ratio 54.7% 52.8% 49.3%Expense ratio 37.5% 35.9% 35.4%Combined ratio 92.2% 88.7% 84.7%Annualised investment return 4.3% 2.5% 1.7%Effective tax rate 15.0% 18.0% 12.0%Annualised return on average equity (2) 15.7% 22.0% 29.1%Earnings per share (US dollars) 0.65 - 0.92Interim dividend per share (pence) 8.1 - 6.0Interim dividend per share (US cents) 16.4 - 11.3 30 June 2007 31 December 2006 30 June 2006 Catlin as reportedTotal assets 9,730,027 8,806,318 4,403,357Investments and cash 5,354,159 5,013,709 2,498,911Stockholders' equity 2,702,581 2,018,280 1,091,214Unearned premiums 1,819,727 1,290,379 872,898Book value per share (sterling) £4.16 £4.12 £3.60Book value per share (US dollar) $8.35 $8.07 $6.67 (1) Represents the aggregation of Catlin 'as reported' and Wellington on a US GAAP basis (2) Excludes preferred shares See also table on Page 3 of Interim Results Statement for an analysis ofacquisition effects. For more information contact: Media Relations:James Burcke, Tel: +44 (0)20 7458 5710Head of Communications, London Mobile: +44 (0)7958 767 738 E-mail: james.burcke@catlin.com Liz Morley, Maitland Tel: +44 (0)20 7379 5151 E-mail: emorley@maitland.co.ukInvestor Relations:William Spurgin, 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. Catlin Group Limited, headquartered in Bermuda, is an international specialist property/casualty insurer and reinsurer writing more than 30 classes of business worldwide through four underwriting platforms and an international network of offices. Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). More information about Catlin can be found at www.catlin.com. 2. Catlin's four underwriting platforms are: • The Catlin Syndicate at Lloyd's of London (Syndicate 2003), which is a recognised leader of numerous classes of specialty insurance and reinsurance. The Catlin Syndicate is the largest at Lloyd's in 2007 based on premium capacity of £1.25 billion. • Catlin Bermuda (Catlin Insurance Company Ltd.), which is a leading participant in the Bermuda market, underwriting a diversified portfolio of property treaty, casualty treaty, political risk and terrorism, and structured risk coverages. • Catlin UK (Catlin Insurance Company (UK) Ltd.), which specialises in underwriting commercial non-life insurance for UK clients through a network of regional offices. It also writes other classes of business written by the Catlin Syndicate. • Catlin US, which encompasses Catlin's operations based in the United States. Catlin US underwrites a wide variety of specialty property/casualty insurance and reinsurance products from a network of offices throughout the U.S. Catlin US includes Catlin Insurance Company Inc. and Catlin Specialty Insurance Company Inc. 3. Catlin's international network of offices allows the Group to diversify further its risk portfolio and to work more closely with local policyholders and brokers. Besides its offices in the UK, US and Bermuda, Catlin operates offices in Canada, Australia, Singapore, Malaysia, Hong Kong, China, Guernsey, Germany, Belgium, France, Spain, Switzerland and Austria. 4. Catlin's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP'). The Group reports its results in US dollars. 5. Rates of exchange at 30 June 2007 -- balance sheet: £1=US$2.01 (30 June 2006: US$1.85); income statement: £1=US$1.98 (30 June 2006: US$1.79). 6. Detailed information regarding Catlin's financial results for the six months ended 30 June 2007, including unaudited consolidated financial statements, is attached. 7. Statements that the Wellington acquisition is expected to be earnings accretive do not constitute a profit forecast and should not be interpreted to mean that the earnings per share in 2007, or in any subsequent period, would necessarily match or be greater than those for the relevant preceding financial year. Catlin Group LimitedInterim Results Statement for the Six Months Ended 30 June 2007 I am pleased to report the excellent progress made by the Catlin Group duringthe six months ended 30 June 2007 following the acquisition of WellingtonUnderwriting plc in December 2006. During the first half Wellington's operationshave been integrated with Catlin's. Virtually no business was lost as a resultof the acquisition, whilst at the same time we have attracted new underwritingteams to the Group and strengthened our staff overall. Broker and client supportfor the acquisition has been very favourable. The Group performed well financially during the first half. Gross writtenpremium volume grew during the period as the Group took advantage of newbusiness opportunities, including business written by Catlin US and our enlargednetwork of international offices. Losses were relatively benign. First-halfprofits were reduced, however, by the residual interests of Wellington's formerthird-party capital providers and by integration costs. These will decline infuture periods and the financial benefits of the transaction (including embeddedgrowth and synergy benefits) will grow. The acquisition is expected to be accretive to earnings per share for 2007 andfor subsequent years. Operating cost and tax synergies are already beingrealised, and we now anticipate that total synergies will be at least US$100million after tax in 2008. The rating environment remained strong across the more than 30 classes ofbusiness that Catlin underwrites, although average rates decreased for bothcatastrophe and non-catastrophe classes during the first half. Absent an extremeevent, we expect that rates overall will continue to decrease during theremainder of the year and into 2008. However, overall market conditions shouldremain favourable, and Catlin's strategy of disciplined underwriting combinedwith controlled expansion in carefully selected areas will serve the Group well. The investment in Catlin US and the international offices, along with the newunderwriting teams, will create new growth opportunities for Catlin in 2008 andbeyond. We look towards the future with optimism. Financial Results The attached financial statements compare the Group's performance in the periodended 30 June 2007 with Catlin's results for the comparable period of 2006. Thefinancial statements do not include Wellington's operations in the first half of2006 as the acquisition date for accounting purposes was 31 December 2006.However, the Group believes that it is useful to compare the Group's first-half2007 results with a pro forma combination of Catlin and Wellington's operationsduring the first six months of 2006. The table below shows the Group's financialresults for the period ended 30 June 2007, compared with both the pro formacombination of Catlin and Wellington operations for the comparable period of2006 ('combined') and Catlin's stand-alone operations for the same period ('asreported'): US$000 30 June 2007 30 June 2006 30 June 2006 combined(1) Catlin as reportedGross premiums written $1,997,507 1,552,904 $903,145Net premiums earned 1,192,212 1,050,152 642,483Investment and other income 133,032 116,339 72,775Total revenues 1,325,244 1,166,491 715,258Losses and operating expenses 1,134,995 938,456 547,859Income before minority interest and income tax expense 190,249 228,035 167,399Minority interest and income tax expense (28,529) (41,117) (20,089)Net income $161,720 186,918 $147,310 Loss ratio 54.7% 52.8% 49.3%Expense ratio 37.5% 35.9% 35.4%Combined ratio 92.2% 88.7% 84.7%Effective tax rate 15.0% 18.0% 12.0%Annualised return on average equity (2) 15.7% 22.0% 29.1% (1) Represents the aggregation of Catlin 'as reported' and Wellington on a US GAAP basis(2) Excludes preferred shares Gross premiums written during the first six months of 2007 amounted to US$2.0billion, a 29 per cent increase from the US$1.6 billion in gross premiumsunderwritten by Wellington and Catlin combined in the first six months of 2006and a 121 per cent increase from the US$903 million underwritten by Catlinalone. If Wellington had owned 100% of its syndicate capacity during 2006, theUS$2.0 billion in gross premium written by the Catlin Group during the firsthalf of 2007 would represent a 7 per cent increase. Net premiums earned amounted to US$1.2 billion or approximately 60 per cent ofgross premiums written, a considerably lower ratio than normal. This earningslag is due primarily to two factors: firstly, most premiums earned were writtenduring previous periods, during which time approximately one-third of thepremiums written by the Wellington Syndicate were for the benefit of third-partycapital providers. Secondly, the Group's reinsurance costs were moreconcentrated in the early part of the year than usual. The earnings lag alsoadversely affected loss, expense and combined ratios. Net income of US$162 million represented a 10 per cent increase on an asreported basis (30 June 2006: US$147 million), but represented a 13 per centdecrease on a combined basis (30 June 2006: US$187 million). Embedded Growth and Acquisition Accounting Effects The Group's financial results are influenced by a number of factors related tothe acquisition of Wellington: €100% ownership of Wellington Syndicate 2020. Up to the end of 2006 when it was acquired by Catlin, approximately one-third of Wellington Syndicate 2020's capacity was attributable to third-party capital providers. The vast bulk of Syndicate 2020's contribution to profits during the first half arises from business written during 2006 and prior. As a result, approximately a third of premiums and associated profits earned by Syndicate 2020 during the first half are for the benefit of that third-party capital; this amounted to profits before tax of US$65 million in the first half of 2007. The Group's share of earned premiums and related profits will increase over time as premiums written in 2007 fully earn. At 30 June, unearned premiums reached US$1.8 billion, a 41 per cent increase compared with US$1.3 billion at 31 December 2007. These will be earned by the Group beginning in the second half of the year. Catlin experienced a similar effect in 2003 following the purchase in late 2002 of the capacity supplied by Lloyd's Names to Catlin-managed syndicates. Because of the lag in earned premium growth, profitability was greater in the second half of 2003 as compared with the first half. •Names' Quota-Share reinsurance. As part of Catlin's acquisition of 100 per cent of the capacity of the Wellington Syndicate, some of the third-party capital providers previously supporting the Wellington Syndicate are participating on a 12.5 per cent quota share ('QS') reinsurance of the Catlin Syndicate for 2007 and 2008. There will be an uplift in retained earned premium upon expiry of the QS at the end of 2008. During the first half of 2007, the QS has an impact on both reinsurance ceded and net earned premiums, although it had a minimal effect on profitability as the 2007 underwriting year is not yet contributing significant earned profits. The impact of the QS on the Group's financial performance in future reporting periods will depend on future profitability. The foregoing factors mean that the Wellington acquisition will provide Catlin with a source of embedded growth over the next several years. •Integration costs and acquisition accounting effects. The Group recorded US$23 million of integration costs during the first half of 2007, which are included in administrative expenses. In addition, policy acquisition costs include the amortisation of the value of the in-force asset ('VIF') that the Group was required to establish under US Generally Accepted Accounting Principles ('US GAAP'). This asset reflects a valuation of the profit embedded in Wellington's unearned premiums at the time of the acquisition and is larger than the deferred acquisition costs that were written off at the time of the acquisition. During the first half of 2007, the amount of VIF amortisation was US$10 million greater than the corresponding deferred acquisition cost amortisation would have been. The VIF will be almost totally amortised by 31 December 2007. Part of the consideration paid for the Wellington Syndicate capacity owned by third-party capital providers related to the value of the QS reinsurance for 2007 and 2008 referred to above. As this was a non-cash transaction, an offsetting reinsurance creditor liability was created and is being amortised to income during 2007 and 2008. This amortisation increased income before tax by approximately US$7 million in the first half of 2007. The impact of these issues on the Group's income statement during the periodended 30 June 2007 is shown in the table below. Overall, these transactioneffects reduced the Group's pre-tax and net income by nearly one-third: 30 June 2007 Names' share Names' QQS of Integration 30 June 2007 as reported of Syndicate Syndicate costs and after 2020 for 2003 for 2007 acquisition acquisitionUS$m 2005-2006 accounting adjustments effectsGross premiums written 1,998 48 - - 2,046Net premiums earned 1,192 183 22 - 1,397Investment and other income 133 27 - - 160Total revenues 1,325 210 22 - 1,557Loss and operating expenses (1,135) (145) (22) 26 (1,276)Income before tax 190 65 - 26 281Income tax expense (28) (20) - (5) (53)Net income 162 45 (0) 21 228 The Group achieved a 16 per cent annualised return on average equity during thefirst half of 2007; annualised return on average equity on an adjusted basiswould have been 22% (30 June 2006: 22% combined). Losses and Expenses The Group's loss ratio during the first six months of 2007 was 54.7 per cent,(30 June 2006: 52.8 per cent combined, 49.3 per cent as reported ). The increasein the loss ratio reflects the weakening rating environment during the periodmore than an increased level of losses. Incurred losses of approximately US$30 million net of reinsurance in the firsthalf resulted from the UK floods in June 2007, divided almost evenly between theCatlin Syndicate and Catlin Bermuda. The Group expects that the UK floods inJuly will result in approximately US$10 million in additional losses, which willbe reflected in the Group's second-half 2007 results. The losses from both theJune and July floods are within the Group's attritional loss expectations. The Group released US$15 million from prior year reserves during the first halfof 2007 (30 June 2006: US$4 million as reported). The Group continues tomaintain reserves that are conservative relative to internal and externalactuaries' best estimates. During the first half, the Catlin reserving approachwas applied to the entire portfolio, including legacy Wellington operations. The expense ratio in the first half was 37.5 per cent (30 June 2006: 35.9 percent combined basis, 35.4 per cent stand-alone basis). The increased expenseratio reflects the lag in earned premium growth, the Group's substantialinvestment in the development of Catlin US and the international office network,and the acquisition accounting effects noted earlier. The expense ratio shoulddecrease in the second half as earned premium volume increases. The Group calculates the expense ratio based on net premiums earned; thefollowing table shows first-half expenses expressed as a percentage of netpremiums earned and written: H1 2007 H1 2006 combinedExpenses as a percentage of:Net premiums earned 37.5% 35.9%Net premiums written 30.9% 30.5% Not included in the first-half 2007 expense ratio are US$23 million inintegration costs related to the Wellington acquisition. The Group's reported combined ratio in the first half of 2007 was 92.2 per cent(30 June 2006: 88.7 per cent combined basis, 84.7 per cent as reported). Investments Net investment income in the first half of 2007 amounted to US$131 million (30June 2006: US$86.6 million combined, US$52 million as reported). The Groupincurred realised and unrealised investment losses of US$33 million due torising interest rates during the period. The total annualised return oninvestment during the period was 4.3 per cent (30 June 2006: 2.5 per centcombined, 1.7 per cent as reported). The first-half 2007 total return oninvestment excludes premiums and expenses related to the Group's catastropheswap and a capital loss on the exercise of share options in Aspen InsuranceHoldings Limited that were acquired with Wellington. The Group's balance sheet was strong as at 30 June 2007. Investments and cashincreased by 7 per cent during the first half to US$5.4 billion (31 December2006: US$5.0 billion). The vast majority of the Group investments during theperiod were invested in fixed maturities and cash and equivalents. Included inthe portfolio at 30 June 2007 were asset-backed securities with a book value ofapproximately US$105 million which have exposure to the sub-prime mortgage market. Of these securities, more than 95 per cent are rated 'AAA' with the balance rated 'AA'. The exposure to the sub-prime market is considered to be insignificant compared with the size of the overall balance sheet. The US$2.6 billion in fixed maturities held by the Group at 30 June 2007 aredivided as follows: Government AAA AA A BBB Other Total & agencyGovernment & agency 34% - - - - - 34%Agency mortgage-backed securities - 8% - - - - 8%Corporate - 1% 6% 10% 1% - 18%Asset-backed securities - 17% - 1% - - 18%Mortgage-backed securities - 21% 1% - - - 22% Total 34% 47% 7% 11% 1% - 100% A review of the Group's long-term investment strategy was completed during thefirst half of 2007. As a result of this strategy, the Group will continue toinvest at least 80 per cent of the portfolio in cash and fixed-incomesecurities, and the review concluded that diversification of up to 20 per centof assets is appropriate to provide an attractive risk-adjusted return. Theimplementation of this strategy will begin in the fourth quarter of 2007 and isexpected to result in an improvement of 50 basis points in the annual investmentreturn beginning in 2008. Integration The integration of Wellington's operations was largely complete by 30 June 2007.During the first half, all of the remaining members of Wellington's London staffrelocated to Catlin's offices, joining the London underwriting team whichrelocated shortly after the acquisition was finalised in December 2006. Inaddition, the underwriting staff and all operational departments within theGroup have been fully integrated. The only major integration milestone thatremains is the full migration of Wellington's historical data to Catlin'ssystems, which will be competed in 2008. Integration costs incurred in the first half amounted to US$23 million,primarily related to personnel, facilities, systems integration and professionalfees. A further US$12 million in integration costs, primarily attributable todata migration and other IT expenses, is expected to be incurred in the secondhalf of 2007. In January 2007 the Group refinanced the US$500 million bridge financingfacility arranged prior to the Wellington acquisition through the issue byCatlin Bermuda of US$600 million in non-cumulative perpetual preferred shares.As well as refinancing the bridge financing facility at a favourable cost, thepreferred shares qualify as capital for regulatory purposes in Bermuda and, inlarge part, for rating agencies. Dividends are paid twice annually at a rate of7.249 per cent. The first dividend was declared in July 2007 and will bereflected in the full-year financial statements. The acquisition will result in synergies relating to operating costs, tax,reinsurance and investments. •The operating cost synergies are projected to be US$22 million on a pre-tax basis in 2007, ahead of the original target of US$14 million made when the transaction was announced in October 2006. Operating cost synergies in 2008 and subsequent years are forecast at US$33 million annualised before tax, an increase from the original projection of US$21 million. •The tax synergies result from the maintenance of capital in Bermuda. The Group's effective tax rate for the first half of 2007 was 15 per cent, within Catlin's medium-term expectations and a reduction from the 18 per cent combined tax rate in the first half of 2006. A reorganisation of the Group's structure was completed in June 2007 that will maximise capital and income flows throughout the Group to Catlin Bermuda. As a result of this reorganisation, the Group expects the effective tax rate to decrease as increased amounts of income emerge from Catlin Bermuda. •The reinsurance and investment synergies are expected to be delivered in 2008. We now expect total annualised after-tax synergies of at least US$100 million in2008, a US$30 million increase compared with the estimate made when thetransaction was announced. The Group expected that some employees would leave the Group following theWellington acquisition. During the period from 18 December 2006, the date thatthe acquisition was declared unconditional, through 30 June 2007, 162 employeesleft Catlin, including 62 agreed departures and 100 resignations. During thesame period, the Group added 157 employees, including 57 new underwriting staff.This new staff represents a significant increase in the resources of the Group.Catlin is now in a growth mode, and additional staff - including newunderwriting teams - have committed to join Catlin during the second half of2007. The Group's total headcount - including contractors - was 1,110 at 30 June2007. Overview of Operations Catlin's experience in the first half of 2007 demonstrated the benefits of theWellington acquisition. Virtually no business has been lost as a result of theacquisition, and it has increased the scale of all four Catlin underwritingplatforms whilst reinforcing the Group's leadership position in many of themarkets in which it operates. Gross premiums written increased 7 per cent during the period when measured onthe basis that assumes that Catlin owned 100 per cent of the WellingtonSyndicate at 30 June 2006. This growth was produced by several sources,including business written by Catlin US and the Group's international offices. The increase in gross premiums written was achieved at attractive pricinglevels, although weighted premium rates across the Group's risk portfoliodecreased by 4 per cent during the period. Average weighted premium rates forcatastrophe-exposed business decreased by 3 per cent, while rates fornon-catastrophe business decreased by 5 per cent. Catlin underwriters continue to refuse to underwrite business that does notoffer adequate profitability potential in line with Catlin's strategy offocusing on bottom-line profit rather than top-line growth. As rates soften, theimportance of Catlin's technical approach to underwriting, involving embeddedactuarial support and active cycle management, increases. This approach includesa well-established and sophisticated rate monitoring process in place since2001. Despite the decrease in average weighted premiums rates during the first half,margins during the period remained strong. The table below shows the rateindexes for various categories of business since 1999: 1999 2000 2001 2002 2003 2004 2005 2006 2007Energy rating 100% 111% 147% 240% 302% 277% 282% 383% 368%Property Direct rating 100% 107% 137% 187% 201% 197% 192% 218% 210%Property Reinsurance 100% 104% 120% 161% 168% 166% 165% 209% 219%Catastrophe aggregate 100% 107% 135% 189% 208% 202% 201% 246% 246% Marine and Property 100% 102% 143% 181% 201% 210% 213% 218% 214%War & Political Risk 100% 102% 131% 230% 240% 226% 212% 207% 194%Specialty 100% 106% 119% 143% 156% 159% 160% 160% 160%Casualty 100% 103% 138% 177% 227% 242% 238% 229% 221%Aerospace 100% 107% 116% 135% 134% 135% 131% 122% 110%Non-catastrophe aggregate 100% 103% 136% 177% 203% 211% 208% 201% 193% Rating index base = 100 in 1999 All four Catlin underwriting platforms - the Catlin Syndicate at Lloyd's, CatlinBermuda, Catlin UK and Catlin US - performed well during the period, and allfour produced underwriting contributions. Analysis of the business on asegmental basis can be found in Note 2 to the Consolidated Financial Statements. The Group continues to seek new business opportunities, both to increase premiumvolume and profitability and to continue to diversify our book of business. Absent a major catastrophic event in the latter half of 2007, the Group expectsa tougher pricing environment in 2008, but also believes that rates as a wholewill continue to be more than adequate and that rates will increase for someclasses of business. Catlin US Catlin US was established in 2006 to take advantage of attractive prospects inthe US market that would not be available to a UK or a Bermuda-based company.Catlin US has developed into a diversified insurance and reinsurance operationthat retains the Catlin Group's strong underwriting culture and focus on grossprofitability. The Group intends to enlarge Catlin US through the addition ofhigh-quality, specialist underwriting teams and through controlled, responsiblepremium growth. The development of Catlin US accelerated during the first half of 2007. Duringthe period: •The integration of the small existing Catlin US operations with Wellington's larger US unit was completed; •Several new specialty classes of business were established through the addition of high-quality underwriting teams; •The underwriting and financial infrastructure of the unit was strengthened; and •Catlin US's two owned insurance companies received 'A' (Excellent) financial strength ratings from A.M. Best. Catlin US originated business (written either by Catlin US's insurance companiesor by other Catlin Group underwriting platforms) increased by 42 per cent toUS$136 million (30 June 2006: US$96 million combined). Of this, US$29 million(30 June 2006: US$20 million combined) was written by the Catlin US insurancecompanies; this is the amount included in the 'Catlin US' segment in thesegmental information. Gross premiums written in the first half and planned for the entire year havebeen impacted by the decision to terminate a large contractor facility becauseof concerns over rate adequacy, which reduces estimated gross premiums writtenfor 2007 by $55 million. The Group now anticipates that Catlin US-originated business will totalapproximately US$350 million in gross premiums during 2007, down from itsprevious estimate of approximately US$450 million. Of that amount, approximatelyUS$140 million will be direct business, whilst US$210 million will bereinsurance. During the period Catlin US established new offices in Cleveland, Ohio, andLexington, Kentucky, and began underwriting inland marine, equine and productrecall insurance. In addition, Catlin US continued to develop the professionalliability and primary/excess casualty classes of business which it establishedduring the second half of 2006. Besides these new specialties, Catlin US also underwrites medical malpracticeinsurance and insurance for smaller- to medium-size enterprises through generalagents. Classes of reinsurance business underwritten by Catlin US include directand brokerage property facultative, property treaty, marine, and accident andhealth. In July, A.M. Best announced that it had assigned a financial strength rating of'A' (Excellent) to Catlin Insurance Company Inc. and upgraded the financialstrength rating of Catlin Specialty Insurance Company Inc. to 'A' (Excellent)from 'A-' (Excellent). The rating assigned to Catlin Insurance Company, anadmitted insurer that Catlin acquired in 2006, allowed the company to beginwriting business, while the upgraded rating assigned to Catlin Specialty, whichwas acquired with Wellington, increases the company's standing in themarketplace. Both companies are included in Financial Size Category XIII ($1.25billion to $1.5 billion). International Offices Catlin's network of international offices is an integral part of the Group'sstrategy to broaden its distribution network and diversify its risk portfolio.During the first half, the Group established four new European offices in Paris,Barcelona, Zurich and Innsbruck. In addition, Catlin established a presence inShanghai as a participant in Lloyd's Reinsurance Company (China) Ltd, areinsurance operation owned by Lloyd's which opened for business in April 2007. Additional underwriting teams and resources have been added to Catlin's existinginternational offices in Europe, Canada, Asia and Australia. Combined, Catlin'sinternational offices wrote US$86 million in gross premiums during the firsthalf, putting the group on track to reach its previously announced estimate ofUS$150 million (31 December 2006: US$106 million). Dividend Catlin is committed to providing an attractive return to shareholders throughthe dividend, and dividend payments are linked to recent trends in the Group'sperformance as well as to future prospects. The Board of Directors has declareda dividend of 8.1 pence per share (16.4 US cents), payable on 9 November 2007 toshareholders of record at the close of business on 12 October 2007. This paymentrepresents a 35 per cent increase over Catlin's 2006 interim dividend of 6.0pence (11.3 US cents) per share and is a 5 per cent increase over the implied interim element of the 2006 full-year dividend of 23 pence (44.1 US cents). Outlook The Group has made excellent progress since the acquisition of Wellington, andwe are confident this progress will continue during the second half of 2007 andduring 2008. Whilst Catlin faces a tougher market with increased competition, webelieve that margins will remain good in the specialty classes of business thatwe underwrite and in the classes that we are targeting for future growth. The advantages provided by the Wellington acquisition will continue to increase.We have already benefited from the increased scale of the Group and willcontinue to do so. The financial benefits of the acquisition will increaseduring the second half, and we expect the acquisition will be earnings accretivefor 2007 and subsequent years. Acquisition-related synergies during 2007 haveexceeded our expectations, and we now expect to realise at least US$100 millionin synergies after tax in 2008. We are on track to meet our financial targets in 2007. We see further growthopportunities in 2008 and beyond, especially in the United States and throughour international offices. We will also benefit further in 2008 from theembedded growth provided by the acquisition. In short, Catlin continues to lookahead with confidence. Stephen CatlinChief Executive Catlin Group LimitedConsolidated Balance SheetsAs at 30 June 2007 and 2006 and 31 December 2006(US dollars in thousands, except share amounts)-------------------------------------------------------------------------------- 30 June 2007 31 December 30 June 2006 (unaudited) 2006 (audited) (unaudited)AssetsInvestments Fixed maturities, available-for-sale, at fair value (amortised cost 2007: $2,593,883; Dec 2006: $2,685,960; June 2006: $1,735,282) $2,556,901 $2,669,437 $1,693,718 Short-term investments, at fair value 78,650 27,565 8,198 Investment in funds 388,403 326,208 - Investment in associate 2,306 2,617 2,498 Total investments 3,026,260 3,025,827 1,704,414 Cash and cash equivalents 2,327,899 1,987,882 794,497Securities lending collateral 41,434 130,854 209,137Accrued investment income 38,738 32,136 17,536Premiums and other receivables 1,504,006 987,768 768,133Reinsurance recoverable (net of allowance of 2007: 1,070,381 1,237,531 522,420$66,070; Dec 2006: $46,791; June 2006: $27,312)Reinsurers' share of unearned premiums 369,739 104,731 112,103Deferred policy acquisition costs 264,014 144,063 151,920Value of in-force business acquired 63,559 118,384 -Intangible assets and goodwill 889,250 868,026 72,491Derivatives, at fair value 9,924 46,037 -Other assets 124,823 123,079 50,706 Total assets $9,730,027 $8,806,318 $4,403,357 Liabilities, Minority Interest and Stockholders'EquityLiabilities:Reserves for losses and loss expenses $4,240,718 $4,005,133 $1,950,583Unearned premiums 1,819,727 1,290,379 872,898Deferred gain - - 1,294Reinsurance payable 506,347 192,958 138,670Accounts payable and other liabilities 129,101 363,399 71,275Notes payable - 550,290 50,000Subordinated debt 99,525 99,936 -Derivatives, at fair value 6,147 619 -Securities lending payable 41,434 130,854 209,137Deferred taxes 183,696 153,721 17,559 Total liabilities $7,026,695 $6,787,289 $3,311,416 Minority interest 751 749 727 30 June 2007 31 December 30 June 2006 (unaudited) 2006 (audited) (unaudited)Stockholders' equity:Ordinary common shares, par value $0.01 Authorised 400,000,000; issued and outstanding2007: 252,950,106; Dec 2006: 238,283,281; June2006: 163,633,683) $2,530 $2,383 $1,636Preferred shares, par value $0.01 Authorised 600,000; issued and outstanding 589,785 - -Additional paid-in capital 1,615,474 1,610,725 791,859Treasury stock (4,033) (6,600) (552)Accumulated other comprehensive loss (12,751) (26,090) (46,983)Retained earnings 511,576 437,862 345,254 Total stockholders' equity 2,702,581 2,018,280 1,091,214 Total liabilities, minority interest and $9,730,027 $8,806,318 $4,403,357stockholders' equity Approved by the Board of Directors on 5 September 2007 Stephen Catlin, Director Christopher Stooke, Director Catlin Group LimitedConsolidated Statements of Operations (unaudited)For the six months ended 30 June 2007 and 2006(US dollars in thousands, except share amounts)-------------------------------------------------------------------------------- 2007 2006RevenuesGross premiums written $1,997,507 $903,145Reinsurance premiums ceded (551,836) (137,152)Net premiums written 1,445,671 765,993Change in net unearned premiums (253,459) (123,510)Net premiums earned 1,192,212 642,483Net investment income 131,052 51,922Net realised losses on investments (14,299) (7,633)Change in fair value of derivatives (5,528) -Net realised gains on foreign currency exchange 10,913 28,314Other income 10,894 172 Total revenues 1,325,244 715,258 ExpensesLosses and loss expenses 652,601 316,564Policy acquisition costs 296,866 157,157Administrative expenses 150,426 61,790Other expenses 35,102 12,348Total expenses 1,134,995 547,859Income before minority interest and income tax expense 190,249 167,399Minority interest 8 -Income tax expense (28,537) (20,089) Net income $161,720 $147,310 Earnings per common shareBasic $0.65 $0.92Diluted $0.61 $0.85 Catlin Group LimitedConsolidated Statements of Changes in Stockholders' Equity andAccumulated Other Comprehensive Income (unaudited)For the six months ended 30 June 2007 and 2006(US dollars in thousands, except share amounts)-------------------------------------------------------------------------------- Preferred Additional Treasury Retained Accumulated Total stock paid-in stock earnings stockholders' Common capital other equity stock comprehensive income (loss)Balance 1 January 2006 $1,559 $- $721,935 $- $228,986 $(21,399) $931,081 Comprehensive income:Net income - - - - 147,310 - 147,310Other comprehensive loss - - - - - (25,584) (25,584)Total comprehensive - - - - 147,310 (25,584) 121,726income/(loss)Equity raise 77 - 65,154 - - - 65,231Stock compensation - - 3,975 - - - 3,975expenseStock options and - - - - - - -warrants exercisedDividends declared - - - - (30,247) - (30,247)Deferred compensation - - 795 - (795) - -obligationTreasury stock purchased - - - (552) - - (552)Balance 30 June 2006 $1,636 $- $791,859 $(552) $345,254 $(46,983) $1,091,214 Balance 1 January 2007 $2,383 $- $1,610,725 $(6,600) $437,862 $(26,090) $2,018,280 Comprehensive income:Net income - - - - 161,720 - 161,720Other comprehensive - - - - - 13,339 13,339incomeTotal comprehensive - - - - 161,720 13,339 175,059incomeIssuance of common 117 - (117) - - - -shares in connectionwith acquisition ofWellingtonIssuance of preferred - 589,785 - - - - 589,785sharesStock compensation - - 7,515 - - - 7,515expenseStock options and 30 - (30) - - - -warrants exercisedDividends declared - - - - (85,461) - (85,461)Deferred compensation - - 2,545 - (2,545) - -obligationTreasury stock purchased - - (2,597) - - (2,597)Distribution of treasury - - (5,164) 5,164 - - -stock held by EmployeeBenefit Trust Balance 30 June 2007 $2,530 $589,785 $1,615,474 $(4,033) $511,576 $(12,751) $2,702,581 Catlin Group LimitedConsolidated Statements of Cash Flows (unaudited)For the six months ended 30 June 2007 and 2006(US dollars in thousands, except share amounts)-------------------------------------------------------------------------------- 2007 2006 Cash flows provided by operating activities $161,720 $147,310Net incomeAdjustments to reconcile net income to net cash provided byoperations: Amortisation and depreciation 8,008 4,213 Amortisation of discounts of fixed maturities (3,306) (7,244) Net realised losses on investments 7,277 7,633Changes in operating assets and liabilities Reserves for losses and loss expenses 132,131 (176,092) Unearned premiums 500,515 161,479 Premiums and other receivables (465,467) (143,052) Deferred policy acquisition costs (116,838) (16,328) Value in-force business acquired 56,900 - Reinsurance payable 287,042 (79,589) Reinsurance recoverable 184,614 151,499 Reinsurers' share of unearned premiums (250,295) (52,145) Deposit with reinsurer (221) (20,583) Deferred gain - (12,408) Accounts payable and other liabilities (186,725) 68,732 Investment in funds (62,277) - Deferred tax 23,931 1,456 Other 2,012 70,460Net cash flows provided by operating activities 279,021 105,341 Cash flows provided by/(used in) investing activitiesPurchases of fixed maturities (1,593,924) (644,684)Purchases of short-term investments (145,812) (46,760)Proceeds from sales of fixed maturities 1,657,937 689,361Proceeds from maturities of fixed maturities 108,456 5,410Proceeds from sales of short-term investments 84,837 12,738Proceeds from maturities of short-term investments 10,422 -Other investments (39,845) -Purchase of intangible assets (67) (3,578)Purchases of property and equipment (7,772) (3,149)Proceeds from sales of property and equipment 7 72Investment of securities lending collateral, net 89,537 (209,137) Net cash flows provided by/(used in) investing activities 163,776 (199,727) 2007 2006Cash flows provided by/(used in) financing activitiesNet proceeds from issue of common shares - $65,786Net proceeds from issue of preference shares 589,785 -Dividends paid on common shares (85,459) (30,037)Proceeds from notes payable - 150,000Repayment of notes payable (550,290) (150,000)Securities lending collateral (repaid)/received (89,537) 209,137Purchase of treasury stock (2,597) (552)Net cash flows provided by/(used in) financing activities (138,098) 244,334Net increase in cash and cash equivalents 304,699 149,948Cash and cash equivalents - beginning of period 1,987,882 609,857Effect of exchange rate changes 35,318 34,692Cash and cash equivalents - end of period 2,327,899 $794,497 Supplemental cash flow informationTaxes paid $5,993 $18Interest paid $7,986 $1,378 Cash and cash equivalents comprise the following:Cash at bank and in hand $2,196,930 $793,232Cash equivalents $130,969 $1,265 Catlin Group LimitedNotes to the Consolidated Financial Statements (unaudited)For the six months ended 30 June 2007 and 2006(US dollars in thousands, except share amounts)-------------------------------------------------------------------------------- 1 General Basis of presentation 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 2006. Business combination Following the acquisition of Wellington Underwriting plc ('Wellington') on 18December 2006, the statement of operations reflects the results of the enlarged Group. Comparative figures do not include the results of Wellington prior to the acquisition. Preferred shares On 18 January 2007, Catlin Group Limited (the 'Group'), through Catlin Insurance Company Limited ('Catlin Bermuda'), issued $600,000 of non-cumulative perpetual preferred shares at a dividend rate of 7.249 per cent, as described in Note 9. New accounting pronouncements In June 2006, the Financial Accounting Standards Board ('FASB') issued FASBInterpretation No. 48, "Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109", ('FIN 48'). FIN 48 provides guidance on financial statement recognition, measurement and disclosure of uncertain tax positions. FIN 48 is effective for fiscal years beginning after 15 December 2006. The Group adopted the provisions of FIN 48 effective 1 January 2007. There were no changes to the Group's financial position as a result of adopting FIN 48. The Group's tax uncertainties are described in Note 8. 2 Segmental information Following the acquisition of Wellington in December 2006, Catlin has madecertain changes to its segmental reporting to reflect the manner in whichresults are now reviewed by management. In 2006, Catlin had four reportable segments: Catlin Syndicate Direct, CatlinSyndicate Reinsurance, Catlin Bermuda and Catlin UK. From 2007, Catlin SyndicateDirect and Catlin Syndicate Reinsurance have been combined into a singlesegment, and Catlin US has been added as an additional reportable segment.Comparative segmental disclosures have been restated accordingly. Catlin US didnot generate business in its own right in 2006, and is consequently not shownseparately in the comparative disclosures. In 2006, segment result was based on income or loss before income tax expense.From 2007, segment result is based on net premiums earned less losses, lossexpenses and brokerage costs. In 2006, segment revenue and results included the effects of intra-Groupreinsurance. From 2007, segment revenue and results are stated prior to theeffects of intra-group reinsurance and therefore reflect reinsurance withexternal parties only. Catlin determines its reportable segments by platform, consistent with themanner in which results are reviewed by management. The four reportable segmentsare: • Catlin Syndicate, which comprises direct insurance and reinsurance business underwritten by the Catlin Syndicate at Lloyd's; • Catlin Bermuda, which primarily underwrites reinsurance business, including intra-Group reinsurance; • Catlin UK, which primarily underwrites direct insurance; and • Catlin US, which primarily underwrites speciality business in the United States. At 30 June 2007, there were four intra-Group reinsurance contracts in place: the50% Corporate Quota Share ('CQS'), which cedes Catlin Syndicate risk to CatlinBermuda, the 60% Quota Share contract ('CUK QS') which cedes Catlin UK risk toCatlin Bermuda and also two 75% Quota Share contract ('CUS QS') which cedeCatlin US risk to Catlin Bermuda. The Qualifying Quota Share ("QQS") contract onthe 2004 Year of Account and the Long Tail Stop Loss ("LTSL") between CatlinSyndicate and Catlin Bermuda have not been renewed however there is still somemovement in 2007 on these contracts as the covered years continue to develop.The effects of each of these reinsurance contracts are excluded from segmentalrevenue and results, as this is the basis upon which the performance of eachsegment is assessed. Net underwriting contribution by operating segment for the period ended 30 June2007 is as follows: Catlin Catlin Catlin Catlin Total Syndicate Bermuda UK USGross premiums written $1,547,246 $229,483 $191,306 $29,472 $1,997,507Reinsurance premiums (460,042) (46,134) (41,762) (3,898) (551,836)cededNet premiums written 1,087,204 183,349 149,544 25,574 1,445,671Net premiums earned 939,512 94,561 134,902 23,237 1,192,212Losses and loss expenses (517,424) (52,132) (67,557) (15,488) (652,601)Brokerage and (209,653) (15,766) (33,309) (3,489) (262,217)commissionsNet underwriting $212,435 $26,663 $34,036 $4,260 $277,394contribution Net underwriting contribution by operating segment for the period ended 30 June2006 is as follows: Catlin Catlin Catlin Total Syndicate Bermuda UKGross premiums written $659,774 $126,743 $116,632 $903,149Reinsurance premiums ceded (109,523) (5,944) (21,685) (137,152)Net premiums written 550,251 120,799 94,947 765,997Net premiums earned 446,401 94,421 101,662 642,484Losses and loss expenses (200,063) (40,112) (76,387) (316,562)Brokerage and commissions (92,952) (16,785) (23,212) (132,949)Net underwriting contribution $153,386 $37,524 $2,063 $192,973 Total revenue is the total of net premiums earned as disclosed above, plus netinvestment income and net realised gain/(loss) on investments, net realised gain/(loss) on foreign currency exchange, and other income. Only net premiums earnedare measured and managed on a segmental basis. 3 Investments Fixed maturities The fair values and amortised costs of fixed maturities at 30 June 2007 and 2006are as follows: 2007 2006 Fair Amortised Fair Amortised Value Cost Value CostUS government and agencies $617,871 $629,194 $857,888 $886,125Non-US governments 261,335 266,343 334,325 340,053Corporate securities 432,725 437,893 235,395 240,044Asset-backed securities 470,866 476,441 73,475 74,434Mortgage-backed securities 774,104 784,012 192,635 194,626Total fixed maturities $2,556,901 $2,593,883 $1,693,718 $1,735,282 The gross unrealised gains and losses related to fixed maturities at 30 June2007 and 2006 are as follows: 2007 2006 Gross Gross Gross Gross unrealised unrealised unrealised unrealised gains losses gains lossesUS government and agencies $81 $11,405 $- $28,238Non-US governments 42 5,049 42 5,769Corporate securities 126 5,295 27 4,676Asset-backed securities 90 5,664 45 1,004Mortgage-backed securities 613 10,521 59 2,050Total fixed maturities $952 $37,934 $173 $41,737 There were no other than temporary declines in the value of investments in thesix months to 30 June 2007 (2006: $nil). The net realised losses on fixedmaturities for the six months ended 30 June 2007 were $7,777 (2006: $7,399). Fixed maturities at 30 June 2007, 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 $29,674 $29,826Due after one through five years 963,960 974,787Due after five years through ten years 302,751 312,603Due after ten years 15,546 16,214 1,311,931 1,333,430Asset-backed securities 470,866 476,441Mortgage-backed securities 774,104 784,012 Total $2,556,901 $2,593,883 Investment in funds The Group has classified its investment in funds as a trading security and,accordingly, all realised and unrealised gains and losses on this investment arerecorded in net income in the consolidated statements of operations. Thisinvestment comprises investments in a fixed maturities fund, an equity fund anda fund of hedge funds. The change in fair value of the investment in funds isrecorded as net investment income. The amount of net investment income for thesix months ended 30 June 2007 that relates to investment in funds still held at30 June 2007 was $14,633 (2006: $nil). 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 7. 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 2007 and 2006are as follows: 2007 2006Fixed maturities, available for sale $1,798,998 $916,148Short term investments 2,406 8,198Cash and cash equivalents 644,278 136,752Total restricted assets $2,445,682 $1,061,098 Securities lending The 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 minimum rate of 102 per cent of the market value of theloaned securities and is monitored and maintained by the lending agent. TheGroup had $40,338 (2006: $206,997) of securities on loan at 30 June 2007. 4 Reserves for losses and loss expenses The Group establishes reserves for losses and loss expenses, which are estimatesof future payments of reported and unreported claims for losses and relatedexpenses with respect to insured events that have occurred. The process ofestablishing reserves is complex and imprecise, requiring the use of informedestimates and judgments. The Group's estimates and judgments may be revised asadditional experience and other data become available and are reviewed, as newor improved methodologies are developed, or as current laws change. Any suchrevisions could result in future changes in estimates of losses or reinsurancerecoverable, and would be reflected in earnings in the period in which theestimates are changed. Management believes they have made a reasonable estimateof the level of reserves at 30 June 2007 and 2006. The reconciliation of unpaid losses and loss expenses for the six months ended30 June 2007 and 2006 is as follows: 2007 2006Gross unpaid losses and loss expenses, beginning of year $4,005,133 $1,995,485Reinsurance recoverable on unpaid loss and loss expenses (996,896) (575,522)Net unpaid losses and loss expenses, beginning of year 3,008,237 1,419,963Net incurred losses and loss expenses forclaims related to: Current year 667,994 320,765 Prior years (15,393) (4,201)Total net incurred losses and loss expenses 652,601 316,564Net paid losses and loss expenses for claimsrelated to: Current year (124,013) (24,047) Prior year (475,792) (271,115)Total net paid losses and loss expenses (599,805) (295,162)Loss portfolio transfer 172,387 -Foreign exchange and other 106,486 53,421Net unpaid losses and loss expenses, end of period 3,339,906 1,494,786Reinsurance recoverable on unpaid loss and loss expenses 900,812 455,797Gross unpaid losses and loss expenses, end of period $4,240,718 $1,950,583 As a result of the changes in estimates of insured events in prior years, the2007 reserve for losses and loss expenses net of reinsurance recoveriesdecreased by $15,393 (2006: decrease of $4,201). In 2007 and 2006, the decreasewas due to changes in estimates of insured events in previous years resultingfrom reductions of expected ultimate loss costs, settlement of losses at amountsbelow previously estimated loss costs and reduction in uncertainty surroundingthe quantification of the net cost of claim events. Loss portfolio transfer During the period, Syndicate 2020 closed the 2004 Lloyd's underwriting year ofaccount by way of a Lloyd's reinsurance to close. In closing the 2004 year ofaccount, all outstanding losses were transferred into the 2005 year of account.The Group had an additional ownership of approximately 10% acquired from theexternal Names in respect of the 2005 year of account, which resulted in anincrease in loss reserves of $172,387; this has been treated as a loss portfoliotransfer. To the extent that the future run-off of the 2004 year of accountdiffers from what has been recorded, that development will be recorded in theConsolidated Statement of Operations in the period that it is incurred. 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: 2007 2006 Premiums Premiums Premiums Premiums written earned written earnedDirect $1,392,546 $1,132,765 $582,153 $493,821Assumed 604,961 348,637 320,992 221,717Ceded (551,836) (289,190) (137,152) (73,055)Net premiums $1,445,671 $1,192,212 $765,993 $642,483 6 Derivative financial instruments Catastrophe swap agreement On 17 November 2006, Catlin Bermuda entered into a catastrophe swap agreement('Cat Swap') that provides up to $200,250 in coverage in the event of a seriesof natural catastrophes. Catlin Bermuda's counterparty in the Cat Swap is aspecial purpose vehicle, Bay Haven Limited ('Bay Haven'). Bay Haven has issuedto investors $200,250 in three-year floating rate notes, divided into Class Aand Class B notes. The proceeds of those notes provide the collateral for BayHaven's potential obligations to Catlin Bermuda under the Cat Swap. The Cat Swap responds to certain covered risk events occurring during athree-year period. No payment will be made for the first three such risk events.Bay Haven will pay Catlin Bermuda $33,375 per covered risk event thereafter, upto a maximum of six events. The aggregate limit potentially payable to CatlinBermuda is $200,250. In addition, on 17 November 2006 Catlin Bermuda entered into a furthercatastrophe swap agreement with ABN AMRO Bank N.V. London Branch which willrespond to the third covered risk event (that is, the covered risk event beforethe Class B notes are triggered). The terms are otherwise as described for theClass A and Class B notes, except that the limit payable is $46,500. The Cat Swap falls within the scope of Statement of Financial AccountingStandards No. 133 ("Accounting for Derivative Instruments and HedgingActivities" as amended ('SFAS 133') and is therefore measured in the balancesheet at fair value with any changes in the fair value included in earnings. Asat 30 June 2007, the fair value of the Cat Swap is a liability of $6,147. Other derivative instruments The Group holds various foreign currency derivatives (forward contracts, capsand collars). As at 30 June 2007, the fair value of the foreign currencyderivatives was $9,924, of which $6,308 had a remaining term of less than 12months. In March 2007 the Group exercised the share options it held with respect toAspen Insurance Group. Following the exercise of the options to purchase3,781,120 shares on a cash-less basis at an exercise price of $22.52 and a shareprice of $25.38, Wellington received 426,083 shares. The sale of the sharesbegan 30 March and was completed on 12 April 2007. The resulting sale resultedin a capital loss of $6,354 from the 31 December 2006 valuation, which has beenincluded in net realised losses on investments in the Consolidated Statements ofOperations. 7 Notes payable, debt and financing arrangements The Group's outstanding debt as at 30 June 2007 and 2006 consisted of thefollowing: 2007 2006Notes payable Revolving bank facility $- $50,000Total notes payable - 50,000Subordinated debt Variable rate, face amount /xA47,000, due 15 March 2035 10,133 - Variable rate, face amount $27,000, due 15 March 2036 29,021 - Variable rate, face amount $31,300, due 15 September 2036 33,791 - Variable rate, face amount $9,800, due 15 September 2036 10,580 - Variable rate, face amount /xA411,000, due 15 September 2036 16,000 -Total subordinated debt 99,525 -Total debt $99,525 $50,000 Subordinated debt On 12 May 2006 Wellington Underwriting plc (which has been subsequently renamed'Catlin Underwriting') issued $27,000 and /xA47,000 of variable rate unsecuredsubordinated notes. The notes are subordinated to the claims of all SeniorCreditors, as defined in the agreement. The notes pay interest based on the rateon three-month deposits in US dollars plus a margin of 317 basis points for theDollar note and 295 basis points for the Euro note. Interest is payablequarterly in arrears. The notes are redeemable at the discretion of the issuerbeginning on 15 March 2011 with respect to the Dollar notes and 22 May 2011 withrespect to the Euro notes. On 20 July 2006 Wellington Underwriting plc issued $31,300, $9,800 and /xA411,000 of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all Senior Creditors, as defined in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 310 basis points for the $31,300 notes and 300 basis points for the other two notes. Interest is payable quarterly in arrears. The notes are each redeemable at the discretion of the issuer on 15 September 2011. Bank facilities Since November 2003, the Group has participated in a Letter of Credit/RevolvingLoan Facility (the 'Club Facility') with three, and since 15 December 2006, fourbanks. Each bank participates equally in the Club Facility. The Club Facility iscomprised of three tranches as detailed below. The Club Facility has beenvaried, amended and restated since it was originally entered into, most recentlyon 15 December 2006 when the credit available under the Club Facility increasedfrom $250,000 and £150,000 to $400,000 and £275,000, respectively. The followingamounts were outstanding under the Club Facility as at 30 June 2007: • Debt outstanding, in the form of a 364-day $50,000 revolving facility with a one-year term-out option ('Facility A'), was $nil. Facility A, while not directly collateralised, is secured by floating charges on Group assets and cross-guarantees from material subsidiaries (together with Facilities B and C). This loan, outstanding at 30 June 2006, was repaid including interest on 22 January 2007. • Clean, irrevocable standby LOC's of $452,250 (£225,000) are provided to support the Catlin Syndicate's underwriting at Lloyd's ('Facility B'). As at 30 June 2007, the Catlin Syndicate has utilised Facility B and deposited with Lloyd's an LOC in the amount of $452,250 (£225,000). In the event that the Catlin Syndicate fails to meet its obligations under policies of insurance written on its behalf, Lloyd's could draw down this letter of credit. This LOC has an initial expiry date of 27 November 2010. Collateral of $80,400 (£40,000) was provided in 2007. • A two-year $350,000 standby LOC facility is available for utilisation by Catlin Bermuda and Catlin UK ('Facility C'). It is split into two equal tranches of $175,000 with the first being fully secured by OECD Government Bonds, US Agencies and or cash discounted at varying rates. The second tranche is unsecured. At 30 June 2007, $101,617 in LOC's were outstanding, of which $98,250 are issued for the benefit of Catlin Bermuda, with a single LOC of $3,367 (£1,675) being for the benefit of Catlin UK. $31,523 of the LOC's were issued on an unsecured basis. The terms of the Club Facility require that certain financial covenants be meton a quarterly basis through the filing of Compliance Certificates. Theseinclude maximum levels of possible exposures to realistic disaster scenarios forthe Group, as well as requirements to maintain minimum Tangible Net Worth andAdjusted Tangible Net Worth levels, the calculations of which are based uponfixed amounts in 2006 and increase over time, for items such as consolidated netincome in future accounting periods. The Group is in compliance with allcovenants during 2007. 8 Taxation Bermuda Under current Bermuda law neither the Company nor its Bermuda subsidiary, CatlinBermuda, are required to pay any taxes in Bermuda on their income or capitalgains. Both the Company and Catlin Bermuda have received undertakings from theMinister of Finance in Bermuda that, in the event of any taxes being imposed,they will be exempt from taxation in Bermuda until March 2016. United Kingdom The Group also operates in the UK through its UK subsidiaries and the income ofthe UK companies is subject to UK corporation taxes. Income from the Group's operations at Lloyd's is also subject to US incometaxes. Under a Closing Agreement between Lloyd's and the Internal RevenueService (IRS), Lloyd's Members pay US income tax on US connected income writtenby Lloyd's syndicates. US income tax due on this US connected income iscalculated by Lloyd's and remitted directly to the Internal Revenue Service andis charged by Lloyd's to Members in proportion to their participation on therelevant syndicates. The Group's Corporate Members are all subject to thisarrangement but, as UK tax residents, will receive UK corporation tax creditsfor any US income tax incurred up to the value of the equivalent UK corporationincome tax charge on the US income. United States The Group also operates in the US through its US subsidiaries and their incomeis subject to both US state and federal income taxes. Other international income taxes The Group has a network of international operations, and they also are subjectto income taxes imposed by the jurisdictions in which they operate, but they donot constitute a material component element of the Group's tax charge. 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 2007 and 2006 is asfollows: 2007 2006Current tax expense $- $18,296Deferred tax expense 28,537 1,793Income tax expense $28,537 $20,089 Unrecognised tax benefits On adoption of FIN 48 as at 1 January 2007, the total amount of the Group'sunrecognised tax benefits was $11,201. As at 30 June 2007, this amount was$2,269. All unrecognised tax benefits would affect the effective tax rate ifrecognised. The Group does not believe it would be subject to any penalties in any open taxyears and has not accrued any such amounts. The Group accrues interest andpenalties (if applicable) as income tax expenses in the financial statements. The following table lists the open tax years that are still subject toexamination by local tax authorities in major tax jurisdictions: Major tax jurisdiction YearsUnited Kingdom 2004-2006United States 2004-2006 9 Stockholders' equity The following is a detail of the number and par value of shares authorised,issued and outstanding as at 30 June 2007 and 2006: Authorised Issued and outstanding Number Par Number Par of shares value of shares value $000 $000Ordinary common shares,par value $0.01 per shareAs at 30 June 2007 400,000,000 $4,000 252,950,106 $2,530As at 30 June 2006 250,000,000 $2,500 163,633,683 $1,636Preference shares, par value$0.01 per shareAs at 30 June 2007 600,000 $1,000 600,000 $1,000 The following table outlines the changes in common shares issued and outstandingduring 2007 and 2006: 2007 2006Balance, 1 January 238,283,281 155,914,616Exercise of stock options and warrants 2,987,188 14,167Equity raise - 7,704,900Business combination 11,679,637 -Balance, 30 June 252,950,106 163,633,683 Equity raise On 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. Business combination As at 31 December 2006 acceptances totalling 88 per cent of Wellington's sharecapital subject to the Group's offer to acquire Wellington ('the Offer') hadbeen settled, resulting in an issuance of 74,414,657 common shares. Theremaining Wellington shares subject to the Offer were settled in 2007, resultingin a further issuance of 11,679,637 shares. Preferred shares On 18 January 2007, Catlin Bermuda issued $600,000 of non-cumulative perpetualpreferred shares, par value of $0.01 per share, with liquidation preference of$1,000 per share, plus declared and unpaid dividends. Dividends are payablesemi-annually in arrears only if, as and when declared by the Board ofDirectors, on 19 January and 19 July, commencing on 19 July 2007, at a rate of7.249 per cent on the liquidation preference, up to but not including 19 January2017. Thereafter, if the shares have not yet been redeemed, dividends will bepayable quarterly at a rate equal to 2.975 per cent plus the 3-month LIBOR Rateof the liquidation preference. Catlin Bermuda received proceeds of approximately$589,785, net of issuance costs, which were used to repay a $500,000 bridgefacility as well as Facility A described in Note 7, and for general corporatepurposes. The preference shares do not have a maturity date and are notconvertible into or exchangeable into any of Catlin Bermuda's or the Group'sother securities. Treasury stock In 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 (assuming full vesting) is paid into an Employee BenefitTrust ('EBT'). The EBT uses these funds to purchase Group shares on the openmarket. These shares will ultimately be distributed to PSP holders to the extentthat the PSP awards vest. During 2007, the Group, through the EBT, purchased267,400 of the Group's shares, at an average price of $9.72 (£4.91) per share.The total amount paid of $2,597 is shown as a deduction to stockholders' equity. In conjunction with the Wellington acquisition, the Group agreed to compensatelegacy Wellington employees that held units in the Wellington EBT. There were nocosts associated with the distribution of the Group shares. Dividends On 8 June 2007, the Group paid a final dividend on the common shares relating tothe 2006 financial year of $0.328 (£0.17) per share to shareholders of record atthe close of business on 11 May 2007. The total dividend paid for the 2006financial year was $0.441 (£0.23) per share. 10 Employee stock compensation schemes The Group has two stock compensation schemes in place under which awards areoutstanding: the PSP, which was adopted in 2004, and a Long Term Incentive Plan('LTIP'), 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 2007 was $7,515 (2006: $3,975). On 9 March 2007, a total of 2,721,517 options with $nil exercise price and518,999 non-vested shares (total of 3,240,516 securities) were granted to Groupemployees under the PSP. Up to half of the securities will vest on 9 March 2010and up to half will vest on 9 March 2011, subject to certain performanceconditions. 11 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. The company has the following potentially dilutive instruments outstandingduring the periods presented: (i) PSP;(ii) LTIP; 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 June2007 and 2006. Reconciliations of the number of shares used in the calculations are set outbelow. 2007 2006Weighted average number of shares 247,566,159 160,688,316Dilution effect of warrants 4,594,329 6,203,859Dilution effect of stock options and non-vested shares 9,991,124 6,930,990Dilution effect of stock options and warrants exercised in 1,593,878 8,106the periodWeighted average number of shares on a diluted basis 263,745,490 173,831,271 Earnings per common shareBasic $0.65 $0.92Diluted $0.61 $0.85 Options to purchase a further 9,624,670 shares (2006: 9,885,557) under the LTIPwere outstanding during the period but were not included in the computation ofdiluted earnings per share because the options' exercise price was greater thanthe average market price of the common shares. 12 Subsequent events On 17 July 2007, the Board of Catlin Bermuda approved a dividend of $21,747 tothe shareholders of the non-cumulative perpetual preference shares. Thisdividend was paid on 19 July 2007. 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