Annual Financial Report

RNS Number : 5353Z

Catlin Group Limited

16 March 2012

 



16 March 2012

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 2011;

2. Notice of Annual General Meeting to be held on 10 May 2012; 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 2011.  Catlin Group Limited's ("Company") consolidated financial statements for 2011, which include details of related part transactions, together with a description of important events during 2011, were appended to the Company's Financial Results announcement published on 9 February 2012.

Risk Management

Catlin has a robust risk management 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.

Catlin's strategy for managing insurance and investment-related risks includes:

•     analysing and assessing insurance risks with high-quality underwriting, actuarial and claims 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 risk transfer 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 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 with 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. From 1 January 2012 the traditional Risk function and the Enterprise Risk Management function were integrated and are headed by the Chief Risk Officer.

The objective of Catlin's Enterprise Risk Management programme is to deliver an embedded Group-wide risk and capital management framework. It is based upon a transparent process to identify, assess and manage risks and to deploy risk appetite utilising an economic capital approach. This is intended to ensure Catlin retains focus on the risk/reward relationship and delivers a full range of benefits that include:

•     an improved understanding of all risks and related capital requirements enhancing capital efficiency;

•     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.

The aim is to ensure that a strong culture based on risk control and risk management continues to be embedded throughout the Group. The Group's Risk and Capital Committee 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 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.

Portfolio management

Catlin uses bespoke portfolio management tools to enhance its understanding of the risk profile of its underwriting and investment portfolios.

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 volatility of return. 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 volatility of return. 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 judgment;

•     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.

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 markets 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 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 risk transfer programme that responds to an array of possible catastrophic events.

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 with the Group Reserving Committee. Reserves are then presented to and approved by the Group Audit 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 markets risk

The Group's investment strategy aims to maximise economic value whilst minimising downside risk to capital and controlling earnings volatility. The investment strategy operates within a comprehensive Market Risk Framework that is based on capital, solvency, liquidity and earnings volatility.

The majority of Catlin's investments are in a low-risk core portfolio of cash and high-quality fixed income investments which is aligned with the profile of the Group's liabilities. This is complemented by a tactical portfolio invested in other instruments to extract premium from Catlin's high levels of liquidity and to benefit from market opportunities as they may arise.

All Group and subsidiary assets are managed by the Group Chief Investment Officer, under the direction of the GEC and the Investment Committee of the Group Board of Directors. The Board of Directors, through the Investment Committee, reviews and approves on a regular basis the investment strategy proposed by the Group Chief Investment Officer along with the limits contained in the Market Risk Framework. Subsidiary boards review and approve the strategy and the investment management framework as it applies to investment of each subsidiary's 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 expected cash flow profile of the liabilities of the Group. Limits are also in place to monitor the financial markets 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 and the Board Investment Committee 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 of the investment strategy to address any emerging issues that may not be reflected in historical data. Assets by subsidiary entity are tested against a benchmark based on the legal entity liabilities with regular reporting to the subsidiary entity management.

Over the course of 2011, the Group has established in-house investment portfolio management capabilities. The investment team was strengthened across all functions, and new systems and processes were implemented as appropriate. The in-house portfolio management activities are fully embedded in the Financial Markets Risk framework, and risk control and oversight processes were adjusted as necessary.

Before a decision is made to contract with an external 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. A new products approval process is followed for any investment instrument.

The Group continuously monitors the performance of each portfolio and manager. The Group performs on-site visits of all external fund managers on a regular basis. Each portfolio and 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 potential liquidity requirements. The Group sets minimum liquidity requirements; liquidity levels at 31 December 2011 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 subsidiaries. The Group Treasurer is also responsible for ensuring that cash is not overly concentrated with any one institution and operates within agreed limits.

The Group conducts business in a number of different currencies, primarily US dollars, sterling and euros. Trading risk arises from potential currency mismatch between cash flows. There is also the risk of gains or losses arising from exposure in currencies other than the entity reporting currency and upon consolidation. The Group takes steps to manage, but not eliminate, those risks. To reduce foreign exchange risk, the Group Treasurer considers 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 subsidiary are addressed as required.

Key financial markets 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.

Through its investment strategy the Group is exposed to interest rate risk, credit risk, foreign exchange risk, equity risk, commodity risk, illiquidity risk and inflation risk. As part of the strategy, the Group may hedge its exposures with overlays and options to manage portfolio and macro risks.

Management of credit risk

The Group is exposed to credit risk primarily from unpaid reinsurance recoveries, banking counterparties and fixed income instruments in the investment portfolio.

The risk of recovering reinsurance is managed by the 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. Credit risk arising from banking counterparties is managed by the Group Treasurer. 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 the underwriting and investment management staffs 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. A comprehensive set of concentration limits designed to reduce the Group's exposure to individual investment and banking counterparties is monitored by the Head of Financial Markets Risk within the Enterprise Risk Management function independently of the operating functions. Areas where significant concentration of risk may exist within insurance and reinsurance recoverables follow a similar set of principles. The Group believes that there are no significant concentrations of credit risk between its investments or its reinsurers.

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 claims 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, incorporating the Group's Change Management and Project Management teams, has defined roles and responsibilities and has put in place criteria for assessing change requirements and ensuring results-driven project management.

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 the Group's current capabilities as well as maintain consistency across the Group as it evolves and grows.

The Group Chief Operating Officer is responsible for an Operations team that supports process improvement and controls throughout the Group. Responsibility for the Operations team as well as Data Quality, Management Information and IT will be transferred to a newly appointed Chief Administrative Officer during 2012.

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 GEC 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 claims quality review is conducted at least annually. Actuarial reserving is reviewed by an independent actuarial firm. In compliance with standards set by the Chartered Institute of Internal Auditors, the effectiveness of the internal audit function is periodically assessed by an independent reviewer.

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 Strategic Review and the Financial Review include 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 John Barton	Chief Financial Officer Non-Executive Director
Guy Beringer	Non-Executive Director
Bruce Carnegie-Brown	Senior Independent 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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