Annual Financial Report
Catlin Group Limited
Annual Financial Report and associated documentation
Copies of the following documents have been submitted to the UK Listing
Authority National Storage Mechanism and are now available at www.hemscott.com/nsm.do :
1. Annual Report and Accounts 2010;
2. Notice of Annual General Meeting to be held on 12 May 2011; and
3. Form of Proxy.
PDF versions of the Annual Report and Accounts and the Notice of Annual General Meeting are available for viewing on the Catlin Group Limited website, www.catlin.co.uk.
In accordance with DTR 6.3.5 (2) (b), a description of principal risks and a responsibility statement are set out below in full unedited text, both as extracted from the Annual Report and Accounts 2010. Catlin Group Limited's ("Company") consolidated financial statements for 2010, which include details of related part transactions, together with a description of important events during 2010, were appended to the Company's Financial Results announcement published on 10 February 2011.
Risk and Capital Management
Catlin has a robust risk and control framework which is designed to address all of the Group's material risks. The Group framework is supported by risk and control frameworks developed for each of the underwriting hubs covering each hub's material risks.
Catlin is in the business of managing insurance risk transferred to the Group by policyholders. The Group holds significant assets on behalf of both policyholders and shareholders which present investment-related risks. These are the risks we take commercially. These risks are compounded by the risks from external forces outside the Group's direct control, such as risks posed by economic uncertainty. Furthermore, there is risk associated with the delivery and execution of the Group's strategy.
Catlin's strategy for managing insurance and investment risks includes:
· Analysing and assessing insurance risks with quality underwriting, actuarial and claim expertise;
· Analysing and selecting high-quality investment options with experienced asset managers;
· Diversifying insurance and investment risks through active portfolio management and risk modelling;
· Allocating capital to business segments based on risk/return considerations;
· Transferring risk through cost-effective reinsurance programmes;
· Retaining risk within an approved risk appetite with appropriate levels of capital; and
· Continuously monitoring for emerging changes affecting risk.
The Group's strategy for managing other business and operational risks includes:
· Identifying and analysing risk through a disciplined risk assessment process;
· Mitigating or avoiding risks that do not fit our business objectives; and
· Retaining risk within an agreed risk appetite with appropriate levels of capital.
Risk governance, roles and responsibilities
The Board of Directors is responsible for the internal control of the Group, including approving business strategy and the Group's annual business plan as well as determining risk appetite. The Group Executive Committee ('GEC') is charged by the Board of Directors for overseeing the risk management programme, including Enterprise Risk Management.
Responsibility for risk management is spread throughout the organisation. The chief executives of the Group's underwriting hubs are responsible for developing and executing a strategy and business plan, subject to the approval of the GEC and the Board of Directors. The hub chief executives are responsible for identifying and managing the risks to the hub's objectives.
The risk management programme is supervised by the Chief Risk Officer except for those issues which are part of the Group's Enterprise Risk Management initiative (see below) which are the responsibility of the Head of Enterprise Risk Management. Both of these individuals provide guidance and support for Risk management practices across the Group, including the underwriting hubs and various Group departments.
The Group's Risk and Capital Committee - whose membership includes the Chief Risk Officer, the Head of Enterprise Risk Management and three members of the GEC - meets regularly and has the following terms of reference:
· Propose risk governance policies and risk limits for GEC approval;
· Review and monitor key risk indicators against risk appetite;
· Oversee governance of internal risk and capital model;
· Consider short- and longer-term capital requirements and assumptions for GEC consideration;
· Monitor economic, regulatory and rating agency capital levels and changes in capital positions against targets; and
· Monitor the asset/liability positions and liquidity profile of the Group and legal entities.
The Emerging Risk Working Group - whose membership includes underwriting, claims, investment, actuarial, risk and ERM representatives - is responsible for considering the potential impact of future issues that might emerge from changes to the external environment. The committee meets regularly and reports to the Group Risk and Capital Committee.
Enterprise Risk Management initiative
During the second half of 2009, Catlin launched an Enterprise Risk Management ('ERM') initiative, resourced by a dedicated team drawn from the Group's existing Risk, Actuarial and Finance staffs. The objective of Catlin's ERM initiative is to integrate the existing risk programmes into a more holistic, embedded Group-wide risk and capital management framework. The strengthened framework will lead to more informed strategic and operational decisions that optimise the risk/reward relationship and enhance capital efficiency.
The Head of Enterprise Risk Management reports directly to the Chief Executive, who has taken personal ownership of the initiative. Catlin's ERM initiative is based upon a transparent communication of risk management and risk appetite utilising an economic capital approach.
The ERM initiative is intended to deliver a full range of benefits that ensure Catlin retains focus on the risk/reward relationship. These include:
· An improved understanding of all risks and related capital requirements;
· Better decision making and enhanced profits driven by the ability to assess and allocate the overall capital requirement using sophisticated capital modelling techniques;
· The selection of the most appropriate strategy from the range of available business decisions with direct reference to the Group's risk appetite, optimal underwriting portfolio, capital requirements, investment strategy; and resultant expected profit and return on equity;
· Stronger internal and external risk management communication;
· The maintenance of a consistent risk management approach throughout the Group as the business continues to grow and evolve; and
· Continuing to meet existing and evolving regulatory risk and capital requirements, including Solvency II.
This programme of works is supported by a comprehensive internal and external communications plan. The aim is to ensure that a strong culture based on risk control and risk management continues to be embedded throughout the Group.
Aggregate management
Catlin underwrites several classes of catastrophe-exposed business. The Group uses sophisticated modelling tools to manage actively its most significant potential catastrophe threats from natural or man-made events.
Accumulation of risk is monitored and controlled against risk appetite limits in compliance with policy and procedures approved by the Group Board of Directors. A selection of modelled outcomes for the Group's most significant catastrophe threat scenarios is detailed below. The modelled outcomes represent the Group's modelled net loss after allowing for all reinsurances.
Modelled gross and net losses
Tables 2 and 3 show both the Data Model output and the Adjusted Data Model output. The Data Model output reflects the Group's interpretation of how external models and methods should be applied and are used internally for market consistent comparisons and for regulatory returns. However, uncertainties exist in the modelling based on the Data Model Output. Due to these uncertainties and the range of potential outcomes, Catlin adds a further prudential margin to the modelled output to reflect the degree of uncertainty in any peril or scenario. This Adjusted Data Model output is used to monitor against the Group's risk appetite, as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and is a key consideration in the assessment of required capital.
Limitations
The modelled outcomes in Tables 2 and 3 are mean losses from a range of potential outcomes. Significant variance around the mean is possible.
Catlin understands that modelling is an inexact science and undertakes mitigating actions against this model uncertainty. Modelling is used to inform and complement the views of both underwriting and actuarial teams.
|
Table 2: Examples of catastrophe threat scenarios/Data model output Outcomes derived as at 1 October 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive) |
|||||
|
US$m |
Florida |
California |
Gulf of |
European |
Japanese |
|
Estimated industry loss |
125,000 |
78,000 |
112,000 |
31,000 |
51,000 |
|
|
|
|
|
|
|
|
Catlin Group |
|
|
|
|
|
|
Gross loss |
945 |
956 |
1,178 |
486 |
472 |
|
Reinsurance effect 1 |
(607) |
(653) |
(696) |
(245) |
(244) |
|
Modelled net loss |
338 |
303 |
482 |
241 |
228 |
|
|
|
|
|
|
|
|
Modelled net loss as a percentage of capital available for underwriting 2 |
13.1% |
11.8% |
18.7% |
9.3% |
8.9% |
|
Table 3: Examples of catastrophe threat scenarios/Adjusted data model output Outcomes derived as at 1 October 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive) |
|||||
|
US$m |
Florida |
California |
Gulf of |
European |
Japanese |
|
Estimated industry loss |
125,000 |
78,000 |
112,000 |
31,000 |
51,000 |
|
|
|
|
|
|
|
|
Catlin Group |
|
|
|
|
|
|
Gross loss |
1,055 |
1,035 |
1,313 |
554 |
544 |
|
Reinsurance effect1 |
(618) |
(664) |
(711) |
(313) |
(281) |
|
Modelled net loss |
437 |
371 |
602 |
241 |
263 |
|
|
|
|
|
|
|
|
Modelled net loss as a percentage of capital available for underwriting2 |
17.0% |
14.4% |
23.4% |
9.4% |
10.2% |
1 Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative.
2 Capital available for underwriting amounted to US$2.6 billion at 30 June 2010; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax.
Portfolio management
Catlin uses bespoke portfolio management tools to enhance its understanding of the risk profile of its underwriting and investment portfolio.
To better evaluate its risk profile, Catlin has developed sophisticated models to construct portfolios of insurance and reinsurance business that explore the relationship between risk and return. In this work, extensive alternative scenarios are considered, each with a different mix of business classes.
This modelling enables the consideration of mixes of business that might produce higher levels of expected profitability with less risk. This output is then analysed in the light of practical market and resource constraints to develop tactical shifts in the Group's mix of business to utilise capital more efficiently.
Portfolio management is designed to help move Catlin towards an efficient frontier where expected return is maximised for a given level of risk. The analysis considers a range of risk metrics over different return periods to ensure that the effects of individual strategies are taken into account.
Catlin's portfolio management analysis is used to support tactical business planning decisions. This modelling considers dynamic near-term market conditions while maintaining awareness of longer-term strategic aims.
Catlin's portfolio management builds on the existing framework of:
· Underwriting skill and judgement;
· Other underwriting tools and management (e.g. pricing models and Catlin's economic capital model);
· Granular-level portfolio management and individual underwriting pricing for risk; and
· Insight into how markets evolve.
Regulatory and rating agency capital requirements
Catlin is committed to full compliance with local regulatory and capital requirements in all relevant jurisdictions where we operate.
Catlin is working with the Association of Bermuda Insurers and Reinsurers as the Bermuda Monetary Authority ('BMA') progresses to an enhanced risk-based capital approach. Catlin is domiciled in Bermuda and in late 2009 delivered a presentation on the Group-wide risk programme to a Supervisors' College convened by the BMA.
The Catlin Syndicate at Lloyd's and Catlin UK (Catlin Insurance Company (UK) Ltd.) will be subject to proposed Solvency II regulatory framework from October 2012. Work is in progress to meet these requirements. As part of this work, Catlin is actively participating in market working groups whose goals are to ensure compliance with the new regulatory regime when it is launched.
The Group participated in an Internal Model Approval Process pilot in conjunction with the UK Financial Services Authority ('FSA') to explore the requirements under Solvency II and has been accepted onto the Internal Model Approval Process for Catlin UK.
During 2010 the Group worked closely with the Swiss Financial Market Supervisory Authority ('FINMA') in meeting the requirements under the Swiss Solvency Test in the establishment of Catlin Re Switzerland.
Catlin's major underwriting units have been assigned financial strength ratings of 'A' (Excellent) by A.M. Best and 'A' (Strong) by Standard & Poor's. These superior ratings reflect these agencies' confidence in the Group's risk management programme and level of capital.
Standard & Poor's reviewed the Group's risk management programme in 2010. Standard & Poor's rated Catlin's Enterprise Risk Management programme as 'Strong', ranking Catlin amongst the top quartile of insurers whose ERM programmes have been reviewed.
Key risks
Key risks are considered both within the control framework and within the assessment of capital requirements. Catlin conducts in-depth stochastic modelling across all risk categories. This modelling aids in the development of capital requirements for strategic and annual business planning. The analysis is also shared with regulators for the development of risk-based statutory capital requirements.
Catlin analyses its key risks in the following categories:
· Insurance risk
o Underwriting risk for new business in a given planning period
o Underwriting risk for business already written but not yet earned
o Reserving risk
· Other risk categories
o Financial market risk
o Liquidity risk
o Currency risk
o Credit risk
o Operational risk
Management of underwriting risk
Underwriting risk includes the risks of inappropriate underwriting, inadequate pricing and ineffective management of underwriting delegated to third parties. The competitive pressures on pricing and underwriting actions for some classes of business can be intense. To manage this risk, the Group pays particular attention to the underwriting control framework. The framework is developed at the Group level and adopted by each underwriting hub.
The Group Underwriting Board and the underwriting committee of each underwriting hub are responsible for overseeing the Group's underwriting operations. The underwriting hubs and the Group Executive Committee ('GEC') develop an annual underwriting plan for the consideration of and approval by the Group Board of Directors and the boards of the respective legal entities. The Group Underwriting Board and the GEC monitor and report on the performance against that plan and pricing adequacy on a quarterly basis by hub and by class of business.
Underwriting is conducted in accordance with a number of technical analytic protocols set by the Group Underwriting Board and is supported by pricing models. This includes defined underwriting authorities, guidelines by class of business, rate monitoring, underwriting peer reviews and protocols for delegation to third parties.
Catlin's diversified underwriting portfolio includes a material segment that is exposed to loss from catastrophic events that might impact numerous customers. The inherent risk of a large aggregation of such losses poses one of the most substantial exposures to the Group. Catlin management has put in place a robust control structure to mitigate the risk. The exposure is further protected by a reinsurance programme that responds to an array of possible catastrophic events. The Company has made use of catastrophe bonds to transfer some of the risk.
The Group Head of Claims directs claims operations across the Group. Claims policies and procedures include defined authority levels, protocols for management oversight, an automated system to support and report on all major claims activity and a formal review process for major claims. Internal and, if appropriate, third-party reviews of claims operations are conducted to ensure that the control framework is effective.
Management of reserving risk
Reserves for unpaid losses represent the largest single component of the Group's liabilities. Loss reserve estimates are inherently uncertain. Actual losses that differ from the provisions, or revisions in the estimates, can have a material impact on future earnings and the Group's balance sheet.
Catlin has a large, experienced team of actuaries and other actuarial staff. They work closely with the underwriting and claims staff within each of the underwriting hubs to ensure understanding of the Group's exposures and loss experience. Analysis of the reserve requirements are initially developed by actuaries embedded within the underwriting hubs with close knowledge of local underwriting activities. Final reserves are developed by the Group actuarial team and reviewed for final selection with the Group Reserving Committee.
The Group Chief Actuary oversees Catlin's reserving processes. In addition, the Group receives independent external analysis of its reserve requirements annually.
Management of financial market risk
Key financial market risks to the Group relate to inappropriate strategy, misalignment with Group risk appetite and achievement of appropriate diversification. These risks might crystallise as financial loss or insufficient risk-adjusted returns.
All Group and subsidiary assets are managed by the Group Chief Investment Officer, under the direction of the Group Executive Committee and the Investment Committee of the Board of Directors. The Board, through the Investment Committee, reviews and approves on a regular basis the investment strategy proposed by the Group Chief Investment Officer. The subsidiary boards review and approve the strategy and the investment management framework as it applies to investment of the subsidiary assets.
Regular modelling is performed to test the structure, performance and liquidity of the investment portfolio in scenarios that include extreme insurance events coupled with investment losses. The economic market risk within the investment portfolio is monitored against set limits measured against a 'Minimum Risk Benchmark' based on the liability profile. Limits are also in place to monitor the financial market risk in the annual accounted earnings under US GAAP.
The Head of Financial Markets Risk within the Enterprise Risk Management function independently reports to the GEC on a monthly basis on the position of Group assets relative to the Minimum Risk Benchmark and monitors the risk within a set of agreed limits. The report includes a qualitative assessment on the investment strategy. Assets by legal entity are tested against a benchmark based on the legal entity liabilities with regular reporting to the legal entity management.
Before a decision is made to contract with an investment manager or invest in a fund, comprehensive due diligence and analysis is carried out by an in-house team, assisted by external professionals where appropriate.
The Group on a monthly basis monitors the performance of each investment manager. The Group performs on-site visits of all fund managers. Each manager is given written investment guidelines against which its activities are monitored. The guidelines are reviewed regularly to ensure their appropriateness, with revisions made as required.
The Group continually monitors its cash and investments to ensure that the Group meets its liquidity requirements. The Group sets minimum liquidity requirements; liquidity levels at 31 December 2010 were significantly higher than the minimum required. The Group Treasurer, together with local financial officers, is responsible for ensuring that sufficient liquid investments are available as required by the Group and its underwriting hubs. The Group Treasurer is also responsible for ensuring that cash is not overly concentrated with any one institution.
The Group conducts business in a number of different currencies, predominantly US dollars, sterling and euros. Trading risk arises from potential currency mismatch between cashflows and expenses. There is also the risk of gains or losses arising from transactions in currencies other than the entity reporting currency and upon consolidation. The Group takes steps to manage, but not eliminate, those risks. To reduce trading risk, the Group Treasurer and local financial officers consider the Group's currency requirements and the risks arising from foreign exchange fluctuations. Actual cash and invested assets are compared with the projected ultimate loss liabilities net of premiums due, reinsurance recoverables and near term operating expense by currency. Shortfalls by currency by legal entity are addressed as required.
The Group may hedge its overall transactional and translational foreign exchange exposures, but does seek to minimise their impact to the extent feasible by aligning its corporate and capital structure with its operating and functional currencies.
Management of credit risk
The Group is exposed to credit risk primarily from unpaid reinsurance recoveries and from fixed income instruments in the investment portfolio. The risk of recovering reinsurance is managed by Group Chief Operating Officer, who along with the Chief Financial Officer is a member of the Group's Reinsurance Security Committee. This committee establishes security standards applicable to all reinsurance purchases and monitors the financial status of all reinsurance debtors. This committee also reviews and approves all non-traditional risk transfers.
Credit risk arising from fixed income instruments is managed by the Group Chief Investment Officer. The professional fund managers are given guidelines regarding minimum quality of investment instruments to be purchased.
Credit risk arising from underwriting risk-taking is managed through the underwriting control framework. There is a high level of communication between Underwriting and Investment Management to ensure awareness and management of any overlapping credit exposure.
Reinsurers and fixed income instruments are monitored for the occurrence of a downgrade or other changes that might cause them to fall below Catlin's security standards. If this occurs, management takes appropriate action to mitigate any loss to the Group.
A comprehensive set of concentration limits designed to reduce the Group's exposure to individual counterparties is monitored by the Head of Financial Market Risk within the Enterprise Risk Management function independently of the operating functions.
Management of operational risk
Operational risk within underwriting is the responsibility of the underwriting hub CEOs and the Group Underwriting Board. They are responsible for putting in place reliable controls to effect the underwriting risk management described above. The Group Head of Claims and the underwriting hub CEOs ensure reliable processes to deliver the claim risk management. Similarly, the Group Chief Investment Officer establishes processes and controls to reliably deliver the investment risk management.
IT system risk is another major element in Catlin's operational risk. The IT function, which reports to the Group Chief Operating Officer, has been restructured together with the Group's Change Management and Project Management teams under a newly appointed Chief Information and Technology Officer. The new organisation has re-defined roles and responsibilities and put in place criteria for assessing change requirements and ensuring results-driven project management.
The Group Chief Operating Officer is further responsible for the Operations team that supports process improvement and controls throughout the Group.
Over the course of the year, the Group has upgraded and increased the automation of its financial reporting processes to meet the needs of a larger, more geographically diverse organisation.
Quality management information and reliable data are key to an effective control framework. Data quality is regularly reviewed by a Data Quality team. A management information working group is in place to ensure continual improvements and enhance our current capabilities as well as maintain consistency across the Group as it evolves and grows.
The Group is exposed to operational risk through its relationships with key counterparties. The Group Treasurer is responsible for monitoring and managing banking relationships, including the potential for over-concentration. The Head of Investment Operations, reporting to the Chief Investment Officer, monitors the performance of all fund managers including compliance with investment guidelines. Risks arising from broker relationships and other local counterparties are managed at the underwriting hub level.
The Chief Executive Officer of each underwriting hub and Group heads of functions, in conjunction with the Group Executive Committee, are responsible for managing operational risk. Each underwriting hub CEO is required to establish and adhere to appropriate operational policies and procedures.
Assurance
The Group Executive Committee and the Board of Directors actively seek assurance of the effectiveness of the risk and control framework. The Group Head of Internal Audit directs an internal audit programme across all Group operations and subsidiaries. The programme is designed to provide reasonable assurance that the Group's controls and procedures are able to contain risks within acceptable limits.
From time to time, the Group obtains assurance from independent third-party specialists on selected key operations. For example, an independent claim quality review is conducted at least annually. Actuarial reserving is reviewed annually by an independent actuarial firm. In compliance with standards set by the Institute of Internal Auditors, the effectiveness of the internal audit function is periodically assessed by an independent reviewer.
2. Directors' Responsibility Statement pursuant to DTR 4
The Annual Report contains the following responsibility statement. The names and functions of the Company's Directors are listed below.
The Directors confirm that, to the best of their knowledge:
· The Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
· The management report incorporated into the Business Review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces
Directors of the Company
|
Name |
Function |
|
Sir Graham Hearne |
Chairman |
|
Stephen Catlin |
Chief Executive and Deputy Chairman |
|
Benjamin Meuli |
Chief Financial Officer |
|
Guy Beringer |
Non-Executive Director |
|
Alan Bossin |
Non-Executive Director |
|
Bruce Carnegie-Brown |
Senior Independent Non-Executive Director |
|
Michael Crall |
Non-Executive Director |
|
Jean Claude Damerval |
Non-Executive Director |
|
Kenneth Goldstein |
Non-Executive Director |
|
Robert Gowdy |
Non-Executive Director |
|
Nicholas Lyons |
Non-Executive Director |
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