Annual Financial Report

RNS Number : 4382X

Catlin Group Limited

08 February 2013

CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2012

HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), the international specialty property/casualty insurer and reinsurer, announces its financial results for the year ended 31 December 2012.

Highlights

· US$339 million profit before tax (2011: $71 million); US$305 million net income to common stockholders (2011: $38 million)

· 14.6 per cent return on net tangible assets (2011: 1.7 per cent); 11.3 per cent return on equity
(2011: 1.3 per cent)

· 10 per cent increase in gross premiums written to US$4.97 billion (2011: US$4.51 billion)

§ 13 per cent increase in gross premiums written for non-London/UK hubs

§ 49 per cent of total GPW produced by non-London/UK hubs

· 50.6 per cent attritional loss ratio (2011: 50.0 per cent)

· 90.0 per cent combined ratio (2011: 102.6 per cent)

· 143 per cent increase in underwriting contribution to US$788 million (2011: US$324 million)

· Total investment return of 2.0 per cent (2011: 3.1 per cent)

· 5.4 per cent increase in annual dividend to 29.5 UK pence per share (46.0 US cents) (31 December 2011: 28.0 UK pence; 44.9 US cents)

US$m	2012	2011
Gross premiums written	$4,972	$4,513
Net premiums written	$3,834	$3,835
Net premiums earned	$3,604	$3,612
Net underwriting contribution¹	$788	$324
Total investment return	$173	$256
Net income before income taxes	$339	$71
Net income to common stockholders	$305	$38
Earnings per share (US dollars)	$0.88	$0.11
Total dividend per share (pence)	29.5p	28.0p
Total dividend per share (US cents)	46.0¢	44.9¢
Loss ratio²	56.0%	70.0%
Expense ratio²	34.0%	32.6%
Combined ratio²	90.0%	102.6%
Total investment return	2.0%	3.1%
Return on net tangible assets³	14.6%	1.7%
Return on equity³	11.3%	1.3%
	31 Dec 2012	31 Dec 2011
Total assets	$14,041	$12,959
Investments and cash	$8,774	$8,388
Stockholders' equity	$3,512	$3,298
Unearned premiums	$2,552	$2,119
Net tangible assets per share (sterling)⁴	£4.05	£3.93
Net tangible assets per share (US dollars)⁴	$6.56	$6.08
Book value per share (sterling)⁴	£5.14	£5.06
Book value per share (US dollars)⁴	$8.32	$7.85

1 Net underwriting contribution is defined as net premiums earned less losses and loss expenses and policy acquisition costs.

2 The expense ratio and the combined ratio include policy acquisition costs and most administrative expenses. These ratios exclude profit-related bonuses, share option scheme costs and certain other Group corporate costs.

3 Returns on net tangible assets and equity exclude non-controlling preferred stock and are calculated by reference to opening balances.

4 Book value and net tangible book value per share exclude non-controlling preferred stock and treasury shares.

John Barton, Chairman of Catlin Group Limited, said:

"Catlin performed well during the year ended 31 December 2012, with a strong underwriting performance. Net underwriting contribution amounted to US$788 million, the highest in five years. The attritional loss ratio remained low at 50.6 per cent, demonstrating the quality and discipline of our underwriting.

"Our diversification strategy is contributing to our underwriting success. The non-London/UK underwriting hubs continue to grow and now account for 50 per cent of overall gross premiums written. More importantly, all of our underwriting hubs produced underwriting contributions in 2012.

"Catlin has the strategy and people in place to deliver excellent results. I am confident that Catlin will continue to produce strong returns for its shareholders."

Stephen Catlin, Chief Executive of Catlin Group Limited, said:

"The value of Catlin's operating strategy was clearly demonstrated by the Group's performance during 2012, during which the Group produced a return on net tangible assets of 14.6 per cent and a return on equity of 11.3 per cent.

"We aim to build on this performance. Market conditions for many classes of business are currently good. Pricing for catastrophe-exposed business is at a high level, following rate increases in 2011 and 2012, as well as further rate improvements for US Property reinsurance at 1 January 2013 renewals in the aftermath of Windstorm Sandy. There is also an improving environment for certain lines of non-catastrophe business, such as US Casualty classes.

"Catlin enters 2013 in an excellent position. Our business model - including our focus on underwriting discipline and our global distribution network - has proved successful. We believe that attractive underwriting opportunities exist across our six underwriting hubs. Our capital base remains solid and flexible. Catlin continues to build a business for the future, and we look ahead with confidence."

- ends -

For more information contact:

Media Relations:
James Burcke, Head of Communications, London	Tel: Mobile: E-mail:	+44 (0)20 7458 5710 +44 (0)7958 767 738 james.burcke@catlin.com
Liz Morley, Maitland	Tel: E-mail:	+44 (0)20 7379 5151 emorley@maitland.co.uk
Investor Relations:
William Spurgin, Head of Investor Relations, London	Tel: Mobile: E-mail:	+44 (0)20 7458 5726 +44 (0)7710 314 365 william.spurgin@catlin.com

Notes to editors:

1. Catlin Group Limited, headquartered in Bermuda, is an international specialist property/ casualty insurer and reinsurer that underwrites worldwide through six underwriting hubs. Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). More information about Catlin can be found at www.catlin.com.

2. Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2012 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment performance commentary.

3. Catlin's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP'). The Group reports in US dollars.

4. Catlin management will make a presentation to investment analysts at 10am GMT today at the Group's London office. The presentation will be broadcast live on the Group's website (www.catlin.com). The webcast will also be available on demand later today.

5. Rates of exchange at 31 December 2012 - balance sheet: £1= US$1.62 (2011: £1 = US$1.55); income statement (average rate): £1 = US$1.59 (2011: £1 = US$1.60).

6. Earnings per share are based on weighted average shares in issue of 349 millionduring 2012. Book value per share is based on 351 million shares in issue at 31 December 2012. Both calculations exclude Treasury Shares held in trust.

7. Catlin has established operating hubs in London, Bermuda, the United States, the Asia-Pacific region, Europe and Canada. Through these hubs, Catlin works closely with policyholders and their brokers. The hubs also provide Catlin with product and geographic diversity. Altogether, Catlin operates more than 55 offices in 21 countries.

8. Catlin's underwriting units are rated 'A' by A.M. Best and Standard & Poor's.

9. Catlin has developed Investor Relations Apps providing easy access to financial and other information regarding Catlin via iPad, iPhone or Android device. The apps can be downloaded free of charge from the Apple App Store or Google Play.

10. Catlin is the title sponsor of the Catlin Seaview Survey, a major scientific expedition that is documenting the composition and health of coral reefs around the world. During 2012 the Survey investigated the Great Barrier Reef off Australia, whilst during 2013 it will study coral reefs near Bermuda, in the Caribbean and elsewhere in the world. The scientific data gathered by the Catlin Seaview Survey is intended to strengthen the understanding of how climate change and other environmental changes are likely to affect ocean ecosystems. More information is available at www.catlinseaviewsurvey.com.

Chairman's Statement

Catlin performed well during the year ended 31 December 2012. After an extraordinary series of natural disasters in 2011 resulted in record catastrophe losses, Catlin's profit before tax recovered to US$339 million.

The Group's underwriting performance was strong. Net underwriting contribution amounted to US$788 million, the highest in five years. The attritional loss ratio - which excludes catastrophe losses, large single-risk losses and reserve movements - remained low at 50.6 per cent, demonstrating the quality and discipline of our underwriting.

Whilst the level of catastrophe losses was far less in 2012 compared with the previous year, our underwriting profitability was reduced by US$225 million in net losses from Windstorm Sandy. In addition, the grounding of the cruise ship Costa Concordia produced US$51 million in net losses for the Group.

Our diversification strategy is contributing to our underwriting success. The non-London/UK underwriting hubs are continuing to grow and now account for half of overall gross premiums written. More importantly, all of our underwriting hubs produced underwriting profits in 2012. We foresee new profitable growth opportunities outside of London, and we expect our London wholesale operations to continue to grow.

As expected, the performance of our investment portfolio did not match that of our underwriting operations. Total investment return in 2012 amounted to 2.0 per cent or US$173 million, a significant reduction from previous years. The low interest rate environment and continued global economic uncertainty has created a tough investment environment for all insurers, including Catlin. We believe that our conservative investment strategy is appropriate in the light of the current market conditions, but we must be aware that investment return over the coming years will likely remain low.

Total investment return 2009-2012 (US$m)

	Total investment return
2009	$419
2010	$212
2011	$256
2012	$173

Shareholder value and dividend

The company increased shareholder value during 2012 after the payment of dividends. Net tangible assets per share increased by 8 per cent to US$6.56 per share, whilst book value per share rose by 6 per cent to US$8.32.

Catlin has increased the dividend paid to shareholders each year since the initial public offering in 2004. The Board of Directors has declared a final dividend of 20 UK pence (31.3 US cents) per share, payable on 22 March 2013 to shareholders of record on 22 February 2013. Including the interim dividend of 9.5 pence (14.7 US cents), the total 2012 dividend of 29.5 pence (46.0 US cents) per share represents a 5 per cent increase compared with the 2011 dividend.

Including the 2012 dividend, the annual dividend payable by Catlin to shareholders in sterling has increased by 173 per cent since 2004. That represents a 13 per cent compound annual growth rate.

Dividends declared 2004-2012 (UK pence)

	Interim dividend	Final dividend	Total dividend
2004	3.8	7.0	10.8
2005	4.7	8.8	13.5
2006	5.2	14.9	20.1
2007	7.1	14.8	21.9
2008	7.5	15.7	23.2
2009	8.2	16.8	25.0
2010	8.6	17.9	26.5
2011	9.0	19.0	28.0
2012	9.5	20.0	29.5

Board of Directors

Fiona Luck was appointed as a Non-Executive Director with effect from 3 August 2012 and has already made substantial contributions to the Board. Fiona has had nearly 30 years of experience as an executive at both insurance companies and brokerages. She most recently was a senior executive at XL Capital Ltd. in Bermuda where she held several roles.

Fiona will stand for election as a Non-Executive Director at the 2013 Annual General Meeting in May.

Kenneth Goldstein, who has served as a Non-Executive Director since 2007, will retire from the Board following the Annual General Meeting. Ken has brought unique insights to the Board from his many years as an insurance industry executive in the United States. I would like to express my thanks to Ken for his service to the Group.

Conclusion and outlook

It was my privilege to succeed Sir Graham Hearne as Catlin's Chairman at last year's AGM. I have been impressed by the quality of the Group, especially its executive management team led by Stephen Catlin. I would like to thank them, along with all Catlin employees, for their hard work on behalf of the Group during the past year.

Catlin's strength has always been its underwriting expertise, and we will continue to build on this solid foundation. The investment in the Group's non-London underwriting hubs over the past decade has been a success. Our brand is increasingly recognised in insurance and reinsurance markets around the world. Rating levels for many classes of business have increased over the past two years, and rate adequacy for catastrophe-exposed coverages is at a particularly high level.

Our underwriting performance in 2012 demonstrated that Catlin has the strategy and people in place to deliver excellent results. I am confident that Catlin will continue to produce good returns for its shareholders.

John Barton

Chairman

Chief Executive's Review

The value of Catlin's operating strategy was clearly demonstrated by the Group's performance during 2012.

Catlin is first and foremost a company that is focused on disciplined underwriting as clearly demonstrated during the past year by the Group's attritional loss ratio of 50.6 per cent. The attritional loss ratio - which measures the quality of the Group's underwriting portfolio before exceptional losses and reserve movements are taken into consideration - was the second lowest in the last five years and illustrates the strength of our business model.

Natural catastrophes and other large losses are part of Catlin's business; they are not common, but neither are they unexpected. During 2011, Catlin and the rest of the insurance industry faced an exceptional series of catastrophe events. During 2012, only one catastrophe event had a significant impact on the Group: Windstorm Sandy, which caused more than US$20 billion in insured damage to portions of the United States. Sandy produced US$225 million in net losses for the Group, an increase from our early estimate of US$200 million.

Whilst not a natural disaster, the grounding of the cruise ship Costa Concordia was a significant large single-risk loss for the Group. The net cost to Catlin is US$51 million, up from our previously announced estimate of US$35 million. The decision by government authorities in Italy to demand that the ship be refloated, rather than scrapped on-site, has significantly increased insurers' costs.

Despite these losses, the Group produced a net underwriting contribution of US$788 million, an increase of 143 per cent compared with 2011 and the highest in the past five years. This was an excellent performance.

Gross premiums written increased by 10 per cent to nearly US$5 billion (2011: US$4.5 billion). Our underwriting hubs outside of the UK continued to grow, with gross premiums written increasing by 13 per cent. However, our London/UK hub also grew meaningfully for the first time in five years as the hub both benefitted from the rate corrections that followed the series of catastrophes in 2011 and pursued focused growth opportunities in specialty classes of business for which market conditions were strong, such as UK Motor.

We aim to build on this performance during 2013. Market conditions for many classes of business are currently good. Pricing for catastrophe-exposed business is at a high level, following rate increases in 2011 and 2012 for many classes impacted by catastrophe losses. Further rate improvements for US Property reinsurance classes were seen in 1 January 2013 renewals in the aftermath of Sandy. There is also an improving environment for certain lines of non-catastrophe business such as US Casualty classes, for which rates increased by 5 per cent in 2012.

2012 performance

Profit before tax amounted to US$339 million, up significantly from US$71 million in 2011. Net income to common stockholders was US$305 million, compared with US$38 million in 2011. The return on net tangible assets was 14.6 per cent (2011: 1.7 per cent), whilst return on equity amounted to 11.3 per cent (2011: 1.3 per cent).

Catlin continues to meet its target to provide returns that exceed the risk-free rate by 10 percentage points over the course of an underwriting cycle. Since the Group's initial public offering in 2004, Catlin's average annual return on net tangible assets has amounted to 16.8 per cent, and annual return on equity has averaged 13.1 per cent. By comparison, the average risk-free rate (as measured by 12-month US dollar Libor) was 2.7 per cent over the period.

Compounded return on net tangible assets 2004-2012

	Return on net tangible assets	Cumulative return on net tangible assets	12-month US dollar Libor	Cumulative 12- month US dollar Libor plus 10 percentage points
2004	21.8%	21.8%	2.1%	12.1%
2005	2.2%	24.5%	4.3%	28.2%
2006	28.2%	59.7%	5.3%	47.8%
2007	36.1%	117.4%	5.1%	70.2%
2008	(2.8%)	111.3%	3.1%	92.5%
2009	33.2%	181.5%	1.6%	114.7%
2010	16.3%	227.4%	0.9%	138.2%
2011	1.7%	233.0%	0.8%	163.3%
2012	14.6%	281.4%	1.0%	192.3%

Strategy

The Group's strategy is based on four major components:

· underwriting discipline;

· diversification, both by geography and by class of business;

· capital preservation and flexibility;

· the Catlin Culture, which forms the foundation for all of our activities and behaviour.

Underwriting discipline

Underwriting discipline is the backbone of the Group's strategy, and I am delighted to say that our underwriting team performed extremely well during 2012.

It is difficult to increase volume year on year whist still maintaining stringent underwriting standards, especially in a business that operates in nearly all regions of the world. However, I am pleased to say that we have succeeded, as measured by both the attritional loss ratio of 50.6 per cent (2011. 50.0 per cent) and the overall loss ratio of 56.0 per cent (2011: 70.0 per cent). Catlin has assembled an excellent team of underwriters worldwide, and the Group has invested heavily in sophisticated pricing and modelling tools that help our team achieve superior performance.

Market conditions were generally favourable during the year. Average weighted premium rates across the Group's underwriting portfolio increased by 4 per cent during 2012 (2011: 2 per cent increase). Average weighted premium rates increased by 8 per cent for catastrophe-exposed business classes and by 2 per cent for non-catastrophe classes. Detailed analysis of the rating environment is contained in the Underwriting Review on page,

Catlin's reserving policy is to establish loss reserves at a best estimate of the likely outcome. Our experience is that this results in small releases from prior-year loss reserves each year. The Group during 2012 released US$139 million from prior year reserves (2011: US$103 million), which is equal to 3 per cent of opening reserves (2011: 2 per cent). The 2012 reserve release continues our track record of consistent reserve releases. Catlin has made a small release from loss reserves each year since the initial public offering in 2004.

Prior-year reserve releases 2008-2012 (US$m)

	Prior-year reserve release
2008	$118
2009	$94
2010	$144
2011	$103
2012	$139

Diversification

A key strategic goal is to maximise the diversification of our underwriting portfolio, both by geography and by business class. Over the past decade, the Group has invested heavily in its operations outside London, and this investment is now contributing solid growth, both in terms of volume and profit.

Gross premiums written by the five non-London/UK underwriting hubs (US, Bermuda, Europe, Asia-Pacific and Canada) grew by 13 per cent to US$2.45 billion (2011: US$2.17 billion). These hubs now account for half of total gross premiums written.

More importantly, the percentage of the Group's net underwriting contribution produced by the non-London/UK hubs increased to 33 per cent of the total (2011: 26 per cent). Net underwriting contribution generated by these hubs increased by more than 200 per cent to US$263 million (2011: US$: 83 million). We believe that these hubs will continue to provide Catlin with profitable growth opportunities in years to come.

A major driver of growth in the non-London/UK hubs has been the development of Catlin Re Switzerland, which began writing business in 2011. Catlin Re Switzerland significantly expanded its client base and product offerings during 2012, exceeding volume targets whilst maintaining profitability.

The Group is now building foundations that will allow it to more easily pursue underwriting opportunities in 'growth' markets, such as China and Latin America, as they arise. A key component of our approach is Catlin's strategic partnership with China Reinsurance (Group) Corporation, which was announced in 2011. Besides sponsoring a Special Purpose Syndicate that underwrites whole-account quota share reinsurance of the Catlin Syndicate at Lloyd's, China Re has greatly increased the Group's knowledge of the insurance/reinsurance market in China.

In April Catlin was granted approval by the China Insurance Regulatory Commission to operate a representative office in Beijing. The representative office allows Catlin to liaise more closely with relevant departments of the Chinese government and insurance industry organisations, as well as conduct market research regarding insurance and reinsurance in China.

Capital preservation and flexibility

Catlin continues to have a solid capital position. The Group aims to maintain a buffer of available capital that is between 10 per cent and 20 per cent greater than required economic capital. At 31 December 2012, the capital buffer was 14 per cent (2011: 14 per cent).

Catlin defines available capital as its net tangible assets and the perpetual preferred shares issued by Catlin Bermuda. The Group does not consider intangible assets, subordinated debt, existing banking facilities and other asset categories when determining its risk appetite. The Group believes that this method of calculating available capital is the most appropriate from an investor's point of view.

The Group increased its capital flexibility in 2012 by establishing several strategic third-party capital arrangements. Three Special Purpose Syndicates were established at Lloyd's for 2012 that provide whole-account quota share reinsurance to the Catlin Syndicate. The capacity of these syndicates was £137 million (US$222 million) in 2012, and it will rise by 20 per cent in 2013. In addition, the Group in 2012 purchased an Adverse Development Cover ('ADC') that, subject to limits, provides protection against the significant deterioration of loss reserves relating to the Group's 2009 and prior underwriting years. The ADC was renewed for 2013 and will now cover 2010 and prior underwriting years.

We believe that these arrangements offer real benefits to Catlin and its shareholders by providing access to a cost-efficient source of capital without diluting the interest of current shareholders. The ADC is a prudent way to reduce the risk of prior-year reserve deterioration, whilst allowing Catlin to still benefit from reserve releases. The Special Purpose Syndicates produce fees and commissions payable to the Group, which amounted to US$14 million in 2012. These amounts are expected to increase significantly in 2013.

Due to additional reinsurance expenditures, net premiums earned were virtually flat in 2012 rather than increasing in line with gross premiums written. On an earned basis, premiums paid with respect to the ADC and the Special Purpose syndicates accounted for slightly less than half of the additional reinsurance spend. The Group also purchased additional coverages, both to provide further protection for certain classes of business and to enhance the overall capital protection provided by the reinsurance programme. Furthermore, we paid more for our reinsurance in the light of the catastrophes of 2011, and reinstatement premiums, which earn immediately, decreased in 2012. Further explanation is provided in the Financial Review.

We believe the additional reinsurance expenditure further strengthens the Group's financial position and benefits both policyholders and shareholders. We would expect a more normal relationship between gross premiums written and net premiums earned to re-emerge in 2013, barring unusual circumstances.

The Group continues to maintain its Catastrophe Aggregate programme, which protects the Group against the frequency and severity of catastrophe events in major catastrophe zones. The loss from Sandy was not large enough to trigger the Catastrophe Aggregate programme in 2012, but the Group continues to believe that this programme is a cost-efficient means to protect the capital base.

In line with our focus on capital preservation, the Group has adopted a conservative investment strategy that aims to maximise economic value whilst minimising volatility and downside risk to capital. Total investment return amounted to 2.0 per cent (2011: 3.1 per cent), which we believe is a reasonable performance in line with our strategy, the economic uncertainty and the low-yield environment which prevailed during the year. In monetary terms, total investment return was US$173 million, a 32 per cent decrease (2011: US$256 million).

In the past, investment return could contribute as much as underwriting contribution towards an insurer's profit, even in benign loss years. Those days appear to be gone, and all insurers - including Catlin - should expect that investment return will lag historic levels until there is a significant change in the economic environment.

Culture

Much of Catlin's success is rooted in the 'Catlin Culture'. Our culture - which is based on five core values: transparency, accountability, teamwork, integrity and dignity - empowers our employees to accept responsibility for their actions and to act like owners. This aligns our employees' interests with those of our clients as well as our shareholders.

Our commitment to client and broker service runs deep throughout the company. For many years we have placed great emphasis on the service that our claims team provides to brokers and clients following a claim. We have long thought that we offer the best claims service in the business, and the 2012 Claims Performance Monitor conducted by Gracechurch Consulting backs this up. Catlin's claims performance was ranked first by surveyed London brokers in nearly every category.

Our responsibilities as a company do not end with our clients. We at Catlin recognise that, as insurers, we need to play a leadership role in learning more about the risks of tomorrow. That is why we are proud to be the sponsor of the Catlin Seaview Survey, which will provide scientists with much more information about how our undersea world may be changing. These changes could have profound effects on the exposures that we insure on land and at sea. Following a successful beginning in 2012, the Catlin Seaview Survey will be expanded in 2013.

Our success begins and ends with our employees. The people who work at Catlin are truly a talented group of individuals, who work extremely well as a team and who are focused on the Group's goals. Working with them is a privilege. I would like to take this opportunity to thank them for their hard work and their diligence, and I look forward to working with them in 2013 to continue Catlin's profitable growth.

Outlook

Catlin enters 2013 in a strong position. Our business model - including our focus on underwriting discipline and our global distribution network - has proved successful. Market conditions improved for many classes of business during 2012, and we believe that attractive underwriting opportunities exist across our six hubs. Our capital base remains solid and flexible.

We continue to build a business for the future, and we look ahead with confidence.

Stephen Catlin

Chief Executive

Key Performance Indicators

Ten key performance indicators measure Catlin's performance against strategic objectives. All of the overall performance KPIs are relevant to Catlin's compensation philosophy, and three are explicitly incorporated in the calculations of performance-related pay and employee share plans.

Book value per share plus dividends (US$)*

	Book value per share	Dividends per share paid during year	Book value per share plus dividends
2008	6.61	0.44	7.05
2009	7.68	0.37	8.05
2010	8.34	0.40	8.74
2011	7.85	0.44	8.29
2012	8.32	0.45	8.77

The Group believes that the change in book value per share, plus the common share dividend paid during a calendar year, is an appropriate measure of shareholder value creation. Shareholder value using this metric increased by 12 per cent during 2012. The vesting conditions of Catlin's Employee Performance Share Plan are based on growth in book value per share plus dividends paid during rolling three- and four-year periods.

Net tangible assets per share plus dividends (US$)*

	Net tangible assets per share	Dividends per share paid during year	Net tangible assets per share plus dividends
2008	4.63	0.44	5.07
2009	5.90	0.37	6.27
2010	6.53	0.40	6.93
2011	6.08	0.44	6.52
2012	6.56	0.45	7.01

Shareholder value can also be measured on a similar basis by combining the annual increase in net tangible assets per share with the dividends paid to shareholders during a calendar year. Growth in net tangible assets per share more accurately assesses the Group's performance against its underwriting capital, which excludes goodwill and other intangibles. Measured on this basis, shareholder value increased by 15 per cent during 2012.

Return on equity/Return on net tangible assets (%)

	Return on equity	Return on net tangible assets
2008	(1.9%)	(2.8%)
2009	24.3%	33.2%
2010	12.5%	16.3%
2011	1.3%	1.7%
2012	11.3%	14.6%

Catlin aims to produce a return on equity that is 10 percentage points above the risk-free rate over an underwriting cycle. Catlin has exceeded this target on a cumulative basis since its IPO in 2004. In 2012 return on equity amounted to 11.3 per cent, whilst return on net tangible assets was 14.6 per cent.

Note: 2008 book value and net tangible assets per share and dividend amounts have been adjusted for the effect of the Rights Issue in February 2009.

Income before tax (US$)

	Income before tax
2008	(13)
2009	603
2010	406
2011	71
2012	339

Pre-tax profitability is an effective measure of the combination of underwriting performance, expense control and investment return. A strong underwriting performance during 2012 was the primary driver of a 377 per cent increase in profits before tax to US$339 million. Profits in 2012, however, were adversely impacted by losses from Windstorm Sandy and an investment return in line with the low-yield environment.

Net underwriting contribution (US$m)

	Net underwriting contribution
2008	$454
2009	$651
2010	$683
2011	$324
2012	$788

Net underwriting contribution is the principal measure of Catlin's underwriting performance. The net underwriting contribution in 2012 of US$788 million, the highest in five years, reflects the Group's focus on disciplined underwriting along with superior portfolio management. Net underwriting contribution was impacted by the US$225 million in net losses sustained from Sandy.

Loss ratio/Attritional loss ratio (%)

	Attritional loss ratio	Loss ratio
2008	54.0%	62.9%
2009	53.7%	57.6%
2010	51.6%	57.5%
2011	50.0%	70.0%
2012	50.6%	56.0%

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is another measure of underwriting performance. The attritional loss ratio - which excludes catastrophe and large single-risk losses and reserve movements - is a measure of underlying underwriting profitability. Despite incurring US$225 million in losses from Sandy, the loss ratio of 56.0 per cent was the lowest in the past five years, whilst the attritional loss ratio remained at a low level.

Gross premiums written by non-London/UK underwriting hubs (%)

	Gross premiums written outside London/UK hub
2008	29.4%
2009	36.8%
2010	42.9%
2011	48.1%
2012	49.2%

Over the past decade, Catlin has significantly diversified its operations geographically, establishing six underwriting hubs in the world's major insurance markets. This diversification reduces the Group's reliance on London wholesale business as well as helps Catlin build stronger relationships with brokers and clients in all parts of the world. More than 49 per cent of Catlin's business was produced by offices outside the United Kingdom in 2012.

Capital buffer (%)

	Capital buffer
2009	19.0%
2010	20.3%
2011	13.8%
2012	14.0%

Catlin defines available capital as its net tangible assets and the perpetual preferred shares issued by Catlin Bermuda. The Group strives to maintain a buffer of available capital that is between 10 per cent and 20 per cent of required economic capital. The capital buffer at 31 December 2012 stood at 14 per cent, virtually unchanged from the previous year.

Claims performance (%)

	Claims performance
2009	31.0%
2010	30.0%
2011	33.0%
2012	34.0%

Catlin believes that an insurer provides greatest value to its clients following a claim. Catlin uses a survey by Gracechurch Consulting as a measure of its claims handling performance. The survey asks London market claims brokers which insurers they would highly recommend to clients based on the quality of claims service. Catlin has consistently ranked first in this survey. In 2012 34 per cent of brokers recommended Catlin. Catlin's score was nearly double its closest competitor's.

Employee turnover (%)

	Employee turnover
2008	14.0%
2009	10.4%
2010	9.8%
2011	12.7%
2012	9.9%

Catlin's most important resource is its people, and the Group places great emphasis on attracting and retaining high-calibre employees. The employee turnover rate measures the Group's success in retaining staff. The employee turnover rate decreased during 2012 to less than 10 per cent. Notably, the turnover rate among the Group's underwriting employees was only 7 per cent, the lowest in five years.

Underwriting Review

Catlin produced a strong underwriting performance during 2012. Net underwriting contribution increased by 143 per cent to US$788 million (2011: $324 million), the highest in five years.

	Net underwriting contribution
2008	$454
2009	$651
2010	$683
2011	$324
2012	$788

The Group's strategic focus on disciplined underwriting combined with geographic and product diversification resulted in a continued low attritional loss ratio, which illustrated the strength of Catlin's core underwriting portfolio.

Unlike 2011, when a record series of natural disasters led to nearly US$1 billion in gross catastrophe claims to the Group, catastrophe loss activity in 2012 was much more subdued. Catlin's results were impacted by only one catastrophe loss, Windstorm Sandy, which caused widespread damage in the United States in late October and early November. Sandy produced US$225 million in losses for Catlin, net of reinsurance and reinstatement premiums.

The Group incurred three large single-risk losses, including one - the grounding of the cruise ship Costa Concordia in January - that cost the Group US$51 million, net of reinsurance and reinstatement premiums.

The Group believes that its ongoing strategy of underwriting discipline and diversification leaves it well positioned for 2013 and beyond, irrespective of market conditions.

Market review

Loss experience

2012 provided a respite for the insurance industry from the exceptional series of natural catastrophes in 2011. Munich Re estimates that natural catastrophes worldwide during 2012 caused US$160 billion in economic damage and US$65 billion in insured damage, compared with US$400 billion and US$119 billion, respectively, in 2011. Aon Benfield estimates economic losses from natural catastrophes during 2012 of US$187 billion, while it estimates insured losses of US$72 billion.

One event - Sandy, now also known as 'Superstorm Sandy' - accounted for more than one-third of all insurance catastrophe losses during 2012. Although the 2012 North Atlantic hurricane season was very active, with 19 named storms, Sandy and Hurricane Isaac, which made landfall on the US Gulf Coast in August, were the only Atlantic windstorms to cause more than US$1 billion in insured damage.

Sandy became the largest Atlantic windstorm (by diameter) ever recorded, spanning more than 1,700 kilometres. Sandy first formed as a tropical storm in the western Caribbean on 22 October, reaching hurricane strength two days later. The storm then caused substantial damage and more than 100 deaths along its path in the Caribbean. The storm then turned towards the north and on 29 October made landfall near Atlantic City, New Jersey.

A combination of factors turned Sandy into a 'superstorm'. A strong high pressure system that was simultaneously moving from the US Plains into the Great Lakes region exacerbated the storm, as did a stationary low-pressure system over the North Atlantic. There was a full moon - and therefore high tides - at the time of landfall. In addition, the fact that the coastlines of Long Island and New Jersey meet at nearly a right angle at New York Bay caused abnormally high storm surges.

More than 130 people were killed in the United States, with hundreds of others injured. More than 5 million people lost power or heat due to the storm. In New Jersey alone, 72,000 homes and businesses were damaged or destroyed.

Whilst initially many observers estimated the insured damage arising from Sandy at approximately US$10 billion, estimates have increased steadily. Munich Re currently estimates total insured damage from Sandy at US$25 billion. Aon Benfield estimates insured damage of more than US$28 billion, including recoveries from the US National Flood Insurance Program.

In December, Catlin announced that estimated net losses to the Group from Sandy amounted to approximately US$200 million, net of reinsurance and reinstatement premiums. At the date of this report, the Group's net loss estimate had increased to US$225 million. There remains some uncertainty as to the ultimate estimate of damage arising from Sandy, both to the industry as a whole and to Catlin.

Sandy was not the only natural catastrophe during 2012, but was the only event that created meaningful losses for the Group.

Largest insured natural hazard events in 2012¹

Dates	Event	Location	Estimated fatalities	Structures damaged	Estimated economic loss (US$bn)	Estimated insured loss (US$bn)
23-29 October	Windstorm Sandy	US, Canada, Caribbean, Bahamas	254	1,800,000	65.00²	28.2²
1 January-31 December	Drought/heat wave	United States	123	Unknown	35.00²	20.0²
28-29 April	Severe weather	United States	1	355,000	4.25	2.4
2-3 May	Severe weather	United States	40	280,000	4.25	2.4
28 June-2 July	Severe weather	United States	28	430,000	3.55	2.0
25-30 May	Severe weather	United States	0	200,000	2.75	1.6
26-31 August	Hurricane Isaac	United States	5	180,000	2.00	1.4
20 and 29 May	Earthquakes	Italy	25	10,000	1.80	1.3
11-13 June	Severe weather	United States	0	135,000	1.75	1.1
6-7 June	Severe weather	United States	0	10,000	1.75	1.0

1 Estimates as at January 2013

2 Loss estimates include private insurance and government-sponsored insurance programmes

Source: Aon Benfield

The only other North Atlantic windstorm to cause more than US$1 billion in insured damage was Hurricane Isaac, which made two landfalls in Louisiana in late August, causing seven deaths. Whilst the storm caused approximately US$1.4 billion in insured damage, the cost incurred by Catlin was modest.

The second-largest natural catastrophe during 2012 was the prolonged drought and heat wave in the United States, the worst in more than half a century. The drought caused more than US$30 billion in economic damages, whilst insured damage amounted to an estimated US$20 billion. Most of those claims were paid by US insurers and government crop insurance programs.

Six of the other seven largest natural hazard losses during 2012 arose from severe weather - consisting of tornadoes, thunderstorms and hail - in the United States. None of these events produced significant claims to Catlin. Two earthquakes in northern Italy in May caused more than US$15 billion in economic damage, of which US$1.3 billion was insured. The earthquakes were both centred near the city of Bologna, causing damage to agriculture, business, homes, personal property and historic buildings.

Whilst not a natural catastrophe, the grounding of the cruise ship Costa Concordia in January captured widespread attention. The Costa Concordia ran aground on a reef at Isola del Giglio, Tuscany, on 13 January with the loss of 32 lives. The grounding was the result of a change to the ship's prearranged route. Italian government officials later ordered that the ship be refloated and towed away rather than being cut up for scrap onsite. This decision significantly increased insurers' costs.

Catlin had originally estimated US$35 million in losses, net of reinsurance and reinstatements, arising from the grounding of the Costa Concordia. The rising complexity of the salvage/scrapping operation has increased Catlin's estimate of the net loss to US$51 million.

Pricing

Average weighted premium rates across the Group's underwriting portfolio increased by 4 per cent during 2012 (2011: 2 per cent increase). Average weighted premium rates increased by 8 per cent for catastrophe-exposed business classes and by 2 per cent for non-catastrophe classes.

Chart 3 shows rate movements across all classes of business, as well as for catastrophe-exposed and non-catastrophe classes, since 1999.

Rating indexes for catastrophe and non-catastrophe business classes 1999-2012

	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Catastrophe classes	283%	261%	250%	253%	230%	251%	256%	205%	207%	213%	193%	135%	107%	100%
Non-catastrophe classes	192%	189%	189%	193%	187%	190%	200%	205%	208%	200%	175%	135%	103%	100%
All classes	220%	211%	208%	211%	200%	209%	217%	204%	206%	204%	181%	135%	105%	100%

Rating index base: 100 per cent in 1999

Pricing for Property Treaty and Direct Property business increased in 2011 and into 2012 as the impact of catastrophe losses in 2010 and 2011 were felt by insurers. Property Treaty Excess of Loss rates increased by 11 per cent overall during 2012, with US and non-US increases of 10 per cent and 14 per cent, respectively.

As anticipated, the quantum of the rate changes reduced over time.

Catastrophe Excess of Loss rate changes at major renewal dates 1 June 2011-1 January 2013

	1 January 2013	1 July 2012	1 June 2012	1 April 2012	1 January 2012	1 July 2011	1 June 2011
US business	4%	3%	8%	8%	17%	5%	8%
Non-US business	0%	11%	22%	15%	12%	34%	41%
Weighted average	2%	6%	8%	13%	14%	17%	9%

Direct Property business classes were similarly impacted during 2012, with rates increasing in most geographic areas. Overall, average weighted premium rates for Property business increased by 6 per cent across the Group.

The table below shows aggregate rate movements for Catlin's six product groups - Aerospace, Casualty, Energy/Marine, Property, Reinsurance and Specialty/War & Political Risk - since 1 January 1999.

Rating indexes for product groups 1999-2012

	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Aerospace	98%	106%	111%	114%	107%	109%	121%	130%	134%	134%	135%	116%	107%	100%
Casualty	211%	201%	197%	203%	197%	204%	215%	227%	236%	222%	171%	138%	101%	100%
Energy/Marine	261%	255%	250%	248%	230%	245%	255%	228%	224%	220%	186%	135%	107%	100%
Property	213%	200%	195%	197%	191%	206%	219%	194%	198%	203%	188%	137%	107%	100%
Reinsurance	258%	242%	234%	237%	219%	232%	230%	192%	190%	188%	170%	123%	105%	100%
Specialty/War & Political Risk	194%	196%	201%	210%	205%	200%	207%	210%	217%	221%	209%	145%	104%	100%

Rating index base: 100 per cent in 1999

Average weighted rate movements by product group for the past two years are shown in the table below.

Average weighted premium rate movements by product group 2011-2012

	2012	2011
Aerospace	(7%)	(5%)
Casualty	5%	2%
Energy/Marine	2%	2%
Property	6%	2%
Reinsurance	7%	3%
Specialty/War & Political Risk	(1%)	(2%)

Rates for Aerospace business, particularly the Airline account, continue to languish, the result of continuing competition and another relatively benign loss year for aviation insurers. Absent an extreme event, it is likely there will be further pressure on Aerospace rates during 2013.

Overall, average weighted rates for Casualty classes increased by 5 per cent during 2012. A portion of this increase was due to the improving rating environment for UK Motor business, a focus of growth for the Group during 2012. However, rates also increased for specialty classes of US Casualty business. Average weighted premium rate increases of 5per cent were seen across US Construction and Financial lines; these rate increases continued month on month during the year, in line with the increases noted by other insurers and market commentators.

Rates for the Group's other Casualty classes have remained broadly flat.

Weighted average premium rates for Energy and Marine business increased by 2 per cent during 2012. The increase was primarily driven by downstream Energy business, for which rates were impacted by loss corrections and an upswing in natural peril pricing. Rates increased only incrementally for Marine classes, despite several large losses; rate changes were generally account-specific. In addition, reduction in the asset value of fleets meant that some rate increases did not translate into increases in the amount of premium paid.

Overall rating for Specialty/War & Political Risks classes of business continued to decrease. Benign loss experience for Terrorism insurance resulted in further downwards rate pressure. Rates relating to the Credit account fell due to increasing competition and the perception that Credit risks had also become more benign.

Gross premiums written

Gross premiums written by the Group increased by 10 per cent to US$5.0 billion during 2012 (2011: US$4.5 billion).

The gross premiums written by financial reporting segment - London/UK, Bermuda, US and International - for the past five years are shown in the table below.

Gross premiums written by financial reporting segment 2008-2012 (US$m)

	2012	2011	2010	2009	2008
London	2,525	2,342	2,323	2,347	2,428
US	1,045	852	707	581	348
Bermuda	523	549	502	421	392
International	879	770	537	366	269
Total	4,972	4,513	4,069	3,715	3,437

For the past several years, nearly all of the Group's premium growth has been produced by Catlin's underwriting hubs in Bermuda, the United States, the Asia-Pacific region, Europe and Canada. These hubs continued to grow in the aggregate during 2012, with gross premiums written by the non-London/UK hubs increasing by nearly 13 per cent to US$2.45 billion (2011: US$2.17 billion). The non-London/UK hubs accounted for 49 per cent of the Group's 2012 gross premiums written (2011: 48 per cent).

However, the London/UK hub - whose volume had been stable over the past four years - increased gross premiums written by 8 per cent in 2012 to US$2.53 billion (2011: US$2.34 billion). The largest driver of the increase was continued traction in UK Motor account, particularly through 'Insure the Box', a product written under a binding authority which utilises telematics technology. In addition, the hub benefitted from pricing corrections in Property classes, new Energy/Marine underwriting opportunities and increasing volume in Specialty classes such as Terrorism, Product Recall and Kidnap & Ransom/Piracy.

The Bermuda hub's volume decreased by 5 per cent, in part due to lower reinstatement premiums in 2012, and the non-renewal of certain business considered by the Group to be inadequately priced.

Gross premiums written by Catlin US grew by 23 per cent to US$1.05 billion (2011: US$852 million). During 2012 the Group changed the accounting method it utilises to recognise premiums relating to quota share reinsurance treaties underwritten by Catlin US, resulting in an increase of US$94 million in gross premiums written. Gross premiums written during 2011 have not been restated; the increase in gross premiums written in 2012 on a like-for-like basis was 12 per cent.

The underlying growth in the US hub was produced by increased traction from existing underwriting teams, particularly in niche specialty Casualty classes, as well as more recently established classes such as Energy. Strong growth was also produced in the hub´s Reinsurance business, largely driven by the further development of Property and Casualty Treaty products.

The International reporting segment includes the Asia-Pacific, Europe and Canada underwriting hubs. The proportion of the International segment's gross premiums written attributable to each of these hubs is shown in the table below.

Gross premiums written by international underwriting hubs 2008-2012 (US$m)

	2012	2011	2010	2009	2008
Europe	444	354	229	175	111
Asia-Pacific	319	304	217	129	105
Canada	116	112	91	62	53
Total	879	770	537	366	269

Gross premiums written by the Europe underwriting hub rose by 25 per cent to US$444 million (2011: $354 million), largely due to the expansion of Catlin Re Switzerland, the Zurich-based carrier which began writing business with effect from 1 January 2011. The European reinsurance operation continued to build its client base during 2012, exceeding volume targets.

The growth in Catlin's direct insurance operations in Europe was more modest, largely due to the difficult economic situation in Continental Europe.

Competitive market conditions for most classes of business limited Catlin Canada's top-line growth, with gross premiums written rising by only 4 per cent to US$116 million (2011: US$112 million) after five years of volume increases averaging 40 per cent.

Underwriting performance

The Group produced US$788 million of net underwriting contribution in 2012 (2011: $324 million), an increase of 143 per cent. This strong underwriting performance was driven by continued low levels of attritional losses, combined with a sharp reduction in catastrophe losses. The Group's loss ratio amounted to 56.0 per cent in 2012 (2011: 70.0 per cent).

An analysis of the components of the loss ratio in 2011 and 2012 is shown in the table below.

Components of loss ratio 2011-2012 (%)

	2012	2011
Attritional loss ratio	50.6%	50.0%
Catastrophe losses	7.0%	21.3%
Large single-risk losses	2.3%	1.5%
Release of reserves	(3.9%)	(2.8%)
Reported loss ratio	56.0%	70.0%

The attritional loss ratio - which excludes catastrophe losses, large single-risk losses and prior-year reserve movements - remained broadly flat at 50.6 per cent (2011: 50.0 per cent), the second lowest in the past five years. Catlin's attritional performance demonstrates that Catlin has been able to maintain strong underwriting discipline whilst continuing to expand its portfolio, often during difficult market conditions.

Catastrophe losses amounted to US$225 million, net of reinsurance and reinstatement premiums (2011: US$678 million). Sandy was the sole component of the catastrophe loss ratio in 2012. This catastrophe accounted for 7.0 percentage points of the loss ratio (2011: 21.3 percentage points). As with any loss of this magnitude, there is still uncertainty as to the ultimate cost, especially with regard to Marine elements. The London/UK, US and Bermuda underwriting hubs all sustained losses as a result of Sandy.

Large single-risk losses during 2012 amounted to US$78 million, net of reinsurance and reinstatement premiums (2011: US$54 million), and represented 2.3 percentage points of the loss ratio (2011: 1.5 percentage points). Large single-risk loss activity in 2012 was broadly in line with the long-term average.

Large single-risk losses are defined as losses arising from man-made causes that exceed expected severity for a given class of business, typically in excess of US$10 million, gross of reinsurance. The Group sustained three large single-risk losses during 2012:

· The grounding of the Costa Concordia in January. The Group estimates this loss at US$51 million, net of reinsurance and reinstatement premiums. Most of this loss was incurred by the London/UK underwriting hub, although some of the loss was paid by the US and Bermuda hubs.

· An explosion and fire at a chemical factory located in Thailand, in May. The net loss of US$12 million was incurred by the Asia-Pacific hub.

· The failure of a telecommunications satellite to reach orbit in August. The loss, amounting to US$15 million net, impacted the London/UK hub.

The Group released US$139 million from prior loss reserves during 2012 (2011: US$103 million), equivalent to 2.6 per cent of opening reserves (2011: 2.3 per cent). The reserve release reduced the 2012 loss ratio by 3.9 percentage points (2011: 2.8 percentage points).

The underwriting performance by each of the Group's reporting segments is analysed in the table below.

Underwriting performance by reporting segment 2011-2012 (US$m)

	London/UK	US	Bermuda	International	Group
2012
Gross premiums written	2,525	1,045	523	879	4,972
Net premiums written	1,883	826	438	687	3,834
Net premiums earned	1,850	733	415	606	3,604
Underwriting contribution	525	88	102	73	788
Loss ratio	48.4%	68.9%	51.9%	66.7%	56.0%
Attritional loss ratio	44.9%	58.4%	40.6%	65.4%	50.6%

2011
Gross premiums written	2,342	852	549	770	4,513
Net premiums written	1,916	726	502	691	3,835
Net premiums earned	1,891	636	471	614	3,612
Underwriting contribution	241	115	(66)	34	324
Loss ratio	65.1%	63.5%	92.4%	74.9%	70.0%
Attritional loss ratio	47.5%	59.6%	32.8%	60.8%	50.0%

The loss ratios produced by the London/UK, Bermuda and International segments improved during 2012 due to the fact that these hubs incurred the vast majority of the series of catastrophe-related losses during the prior year. The US hub's loss ratio increased by 5.4 percentage points as a result of Sandy.

The London/UK underwriting hub produced an exceptional performance in 2012. The attritional loss ratio improved to 44.9 per cent (2011: 47.5 per cent), driven by benign loss experience in Aerospace and Energy & Marine classes. Underwriting contribution increased by 118 per cent.

The Bermuda hub's attritional loss ratio rose to 40.6 per cent (2011: 32.8 per cent), which in part reflected a change in business mix. This included growth in Agricultural reinsurance, which sustained some losses resulting from the US drought. These losses were not of sufficient magnitude to be classified as a catastrophe loss. However, the global and diversified nature of our agricultural product offering meant that underperformance in the US was offset by outperformance in international agriculture business which had more benign loss experience. In the aggregate, this business performed in line with expectations.

The increase in the International segment's attritional loss ratio was driven by a number of losses, including the Italian earthquakes in May, which were not classified as a 'catastrophe' event as the total loss to the Group did not exceed US$50 million.

Product groups

Catlin's six product groups underwrite most classes of commercial specialty insurance and reinsurance. The gross premiums written by the major categories in each product group are shown in the tables below.

Gross written premiums by product group 2011-2012 (US$m)

Aerospace Product Group

	2012	2011
Aviation	349	352
Satellite	33	44
Total	382	396

Casualty Product Group

	2012	2011
Professional/Financial	386	379
General Casualty	332	326
Motor	216	135
Marine	88	83
Total	1,022	923

Energy/Marine Product Group

	2012	2011
Upstream Energy	218	213
Cargo	155	125
Hull	125	140
Downstream Energy	107	87
Energy Liability	95	54
Specie	72	70
Total	772	689

Property Product Group

	2012	2011
International	344	308
US	117	106
Binding Authorities	111	101
Total	572	515

Reinsurance Product Group

	2012	2011
Non Proportional Property	776	781
Proportional Property	403	365
Casualty	224	181
Specialty	200	147
Marine	163	119
Total	1,766	1,593

Specialty/War & Political Risks Product Group

	2012	2011
War & Political Risks, Terrorism & Credit	213	199
Accident & Health	128	121
Equine/Livestock	86	78
Contingency	24	12
Total	451	410

The underwriting performance for each product group is shown in the table below.

Underwriting results by product group (US$m)

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	Rate change
2012
Aerospace	382	279	291	98	44%	(7%)
Casualty	1,022	741	709	51	73%	5%
Energy/Marine	772	593	542	104	57%	2%
Property	572	465	414	30	63%	6%
Reinsurance	1,766	1,574	1,378	278	60%	7%
Specialty/War & Political Risks	451	419	398	221	23%	(1%)
2011
Aerospace	396	315	338	101	51%	(5%)
Casualty	923	720	687	27	78%	2%
Energy/Marine	689	518	482	54	64%	2%
Property	515	428	404	53	58%	2%
Reinsurance	1,593	1,506	1,332	(75)	87%	3%
Specialty/War & Political Risk	410	367	387	180	32%	(2%)

Catlin continued to carefully manage its Aerospace portfolio during 2012 due to the continuation of challenging market conditions for these classes of business. Gross Aerospace premiums written were reduced by 4 per cent, primarily driven by rate reductions and non-renewal of accounts with insufficient rate adequacy. Underwriting contribution was virtually flat, partly due to benign market loss experience but also as a result of careful underwriting of the Group's core book of Aerospace business.

Gross Casualty premiums written increased by 11 per cent, primarily driven by the continued growth of the Group's UK Motor account and expansion of the US Casualty speciality portfolio. Rates strengthened in both of these areas during 2012. The Casualty loss ratio decreased in 2012, whilst net underwriting contribution rose by 89 per cent, reflecting the improved conditions across certain Casualty classes and continued proactive management of the portfolio.

Gross premiums written by the Energy/Marine product group increased by 12 per cent, due to growth in Cargo business, continued growth in the Catlin US Energy account established in 2011 and new opportunities within the Onshore Energy portfolio. The Energy/Marine loss ratio decreased to 57 per cent (2011: 64 per cent), primarily due to improvement in Energy attritional loss performance. This improvement more than offset the losses arising from the Marine portfolio from Sandy and the Costa Concordia grounding. Overall, the underwriting contribution for the Energy/Marine product group increased by 93 per cent.

Property insurance volume increased by 11 per cent. Gross premiums written increased for both US and International Property Facultative business, where rate increases followed the 2011 losses. In addition, volume also increased in the Construction class. The increase in the loss ratio to 63 per cent (2011: 58 per cent) was primarily due to Windstorm Sandy, which produced direct Property claims as well as Reinsurance losses.

Gross premium written by the Reinsurance product group increased by 11 per cent. However, if the accounting change relating to US quota share reinsurance is not considered, the increase in volume was 5 per cent. The underlying growth was driven by further development of Catlin Re Switzerland as well as US Casualty and Property Treaty business underwritten by the US hub. The Reinsurance loss ratio decreased substantially to 60 per cent (2011: 87 per cent), primarily due to the reduction in Catastrophe losses during 2012. Consequently, the net underwriting contribution increased to US$278 million (2011: US$75 million loss).

Specialty/War & Political Risks volumes have increased by 10 per cent, primarily due to the re-introduction of Contingency business to the London/UK hub as well as increasing volumes in classes such as Credit, Terrorism and Equine. The product group continued to produce an excellent loss ratio and net underwriting contribution, demonstrating Catlin's selective approach to underwriting in an increasingly competitive marketplace.

2013 renewals

Average weighted premium rates for the portion of Catlin's portfolio that renewed on 1 January 2013 increased by 2 per cent. Rates for catastrophe-exposed classes rose by 3 per cent, whilst rates for non-catastrophe classes were flat.

Significant rate increases were achieved for US Property and Marine reinsurance treaties, which were significantly impacted by Sandy. Rates for US Catastrophe Treaty business rose by a weighted average of 4 per cent, whilst rates for non-US Catastrophe business were generally flat, although it should be noted that Japanese and New Zealand treaties, for which rates rose significantly during 2012, generally renew on 1 April and 1 July.

Rates for Marine Treaty reinsurance rose by an average of approximately 5 per cent across the portfolio, although more significant increases applied to the US-exposed portion of this portfolio. Rates for Casualty reinsurance, which makes up a small portion of 1 January renewals, were flat.

Overall, average weighted premium rates for business renewed for the Reinsurance product group rose by 2 per cent.

Direct Property insurance renewals were also impacted by Sandy. Whilst there is a limited amount of US Direct and Facultative Property business renewed at 1 January, rate increases were generally in the high single digits, similar to December renewals.

Gross premiums written for most other classes of business at 1 January are relatively modest, as renewals are heavily weighted towards reinsurance business. Average weighted premium rates continued to rise modestly for Casualty and Energy/Marine classes. However, Aerospace accounts renewing in January saw rate reductions following a relatively benign year for losses.

Rate movements at 1 January 2013 for the six product groups are shown in the table below.

Rate movements at 1 January 2012 and 2013

	2013	2012
Aerospace	(5%)	3%
Casualty	1%	2%
Energy/Marine	1%	3%
Property	5%	3%
Reinsurance	2%	7%
Specialty/War & Political Risk	(1%)	0%

Overall, gross premiums written as at 31 January 2013 increased by 14 per cent, which was in line with the Group's expectations.

Outlook

The positive rate movements across many of Catlin's product groups, along with the rate increases for US Property reinsurance contracts at 1 January 2013, are providing a good underwriting environment for 2013. Whilst rates for some business categories, such as Aerospace, have decreased for several years, this is counter-balanced by the steady corrections now taking place in classes such as US Casualty and UK Motor,

Looking ahead, the Group plans to continue to leverage its deep pool of underwriting talent and its technical expertise. Catlin has a proven track record of underwriting discipline and a growth potential that is supplied by our underwriting hubs in major insurance markets around the world. Catlin's strategy for the coming year can best be described as 'more of the same': the Group will continue to focus on underwriting profitability whilst exploiting promising market opportunities whenever and wherever they arise.

Financial Review

Consolidated Results of Operations (US$m)

	2012	2011	% change
Revenues
Gross premiums written	4,972	4,513	10%
Reinsurance premiums ceded	(1,138)	(678)	68%
Net premiums written	3,834	3,835	-
Change in net unearned premiums	(230)	(223)	3%
Net premiums earned	3,604	3,612	-

Net investment return	158	248	(36%)
Net (losses)/gains on foreign currency	(15)	9	(267%)
Other income	8	4	100%
Total revenues	3,755	3,873	(3%)
Expenses
Losses and loss expenses	2,020	2,529	(20%)
Policy acquisition costs	796	759	5%
Administrative and other expenses	586	504	16%
Financing costs	14	10	40%
Total expenses	3,416	3,802	(10%)

Income before income taxes	339	71	377%
Income tax benefit	10	11	N/M
Net income	349	82	326%
Non-controlling preferred stock dividend	(44)	(44)	-
Net income available to common stockholders	305	38	703%

Loss ratio¹	56.0%	70.0%
Expense ratio²	34.0%	32.6%
Combined ratio³	90.0%	102.6%
Tax rate⁴	(2.8%)	(15.6%)
Return on net tangible assets⁵	14.6%	1.7%
Return on equity ⁶	11.3%	1.3%
Total investment return ⁷	2.0%	3.1%

N/M Not meaningful

1 Calculated as losses and loss expenses divided by net premiums earned

2 Calculated as the total of policy acquisition costs, controllable and non controllable expenses divided by net earned premiums; corporate expenses representing profit-related bonus, employee share option schemes and certain Group corporate costs are not included in the calculation

3 Total of loss ratio plus expense ratio

4 Calculated as income tax expense divided by income before income taxes

5 Calculated as net income available to common stockholders divided by net tangible assets (opening common stockholders' equity adjusted for capital issued during the year less intangible assets and associated deferred tax)

6 Calculated as net income available to common stockholders divided by opening common stockholders' equity adjusted for capital issued during the year

7 Calculated as total investment income divided by average invested assets during the year

Catlin's income before tax amounted to US$339 million in 2012, compared with $71 million in the previous year. This result was primarily driven by the 143 per cent increase in net underwriting contribution to US$788 million (2011: US$324 million), reflecting a decreased loss ratio of 56.0 per cent (2011: 70.0 per cent). The Group produced a strong underwriting performance in 2012 despite the impact of Windstorm Sandy, which generated losses to Catlin of US$225 million, net of reinsurance and reinstatement premiums. Underwriting performance in 2011 was heavily impacted by the exceptional series of catastrophe losses (US$961 million gross, US$678 million net of reinsurance and reinstatement premiums).

Another key driver of income before tax is total investment return. The Group produced a total investment return of 2.0 per cent (2011: 3.1 per cent), which amounted to US$173 million (2011: US$256 million). The reduced investment return reflects the low yields and uncertain economic environment throughout the year.

Consolidated Results of Operations

An analysis of income before income taxes is shown in table below.

Income before income taxes (US$m)

	2012	2011	% change
Net underwriting contribution	788	324	143%
Total investment return	173	256	(32%)
Administrative expenses - controllable	(394)	(374)	5%
Administrative expenses - non controllable	(37)	(45)	(18%)
Administrative expenses - corporate	(155)	(85)	83%
Financing and other	(21)	(14)	(50%)
Foreign exchange	(15)	9	(267%)
Income before income taxes	339	71	377%

The following commentary compares the Group's 2012 financial results with the results for 2011. The impact of using constant exchange rates on year-to-year changes is insignificant.

Gross premiums written

Gross premiums written increased by 10 per cent to US$5.0 billion (2011: US$4.5 billion). During the year, the Group changed the accounting method it utilises to recognise premiums relating to quota share reinsurance treaties underwritten by the Group's US underwriting hub. This change resulted in an increase of $94 million in gross premiums written. Gross premiums written during 2011 have not been restated; the increase in gross premiums written in 2012 on a like-for-like basis was 8 per cent.

Aggregate gross premiums written by the Group's underwriting hubs outside the UK (Bermuda, US, Asia-Pacific, Europe and Canada) increased substantially, rising by 13 per cent to US$2.4 billion (2011: US$2.2 billion). These underwriting hubs accounted for 49 per cent of the total gross premiums written by the Group (2011: 48 per cent).

Gross premiums written by the London/UK underwriting hub increased by 8 per cent to US$2.5 billion (2011: US$2.3 billion), the first meaningful increase since 2007.

Rates increased slightly during the year for many classes of business following the catastrophe events in 2011, with average weighted premium rates rising by 4 per cent across the portfolio. Rates for catastrophe-exposed classes of business increased by a weighted average of 8 per cent, whilst average weighted premium rates for non-catastrophe classes increased by 2 per cent.

The five year growth in the Group's gross premiums written is shown the table below.

Growth in gross premiums written (US$m)

	Gross premiums written
2008	$3,437
2009	$3,715
2010	$4,069
2011	$4,513
2012	$4,972

Reinsurance premiums ceded

Reinsurance premiums ceded increased by US$460 million to US$1.14 billion (2011: US$678 million). The percentage of gross premiums written ceded to reinsurers increased to 23 per cent (2011: 15 per cent).

The increase in reinsurance premiums ceded reflects:

· additional coverage purchased by the Group, both to provide further protection for certain business classes and to enhance the Group's overall capital position;

· the higher cost of protection in the aftermath of the 2011 catastrophes;

· premiums paid with respect to the Adverse Development Cover ('ADC') purchased by the Group at 1 January 2012; and

· premiums ceded to the three Special Purpose Syndicates which provided whole-account quota share reinsurance to the Catlin Syndicate at Lloyd's during 2012.

Total commissions and fees from the Special Purpose Syndicates recognised in 2012 amounted to US$14 million (2011: nil). The Group expects that amount will rise significantly in 2013.

Net premiums earned

Net premiums earned, amounting to US$3.60 billion, were virtually flat (2011: US$3.61 billion). The lack of growth in net premiums earned during 2012 was attributable to several factors including:

· the increase in the amount of premiums ceded to reinsurers, including the ADC and the Special Purpose Syndicates; and

· the higher level of reinstatement premiums earned in 2011 as a result of the high level of catastrophe losses experienced. These are earned immediately under US GAAP.

The movement in net premiums earned in 2012 is shown in the table below.

Movement in net premiums earned: 2011-2012 (US$m)

	Movement in net premiums earned
2011 net premiums earned	3,612
Increase in third-party reinsurance spend	(292)
Decrease in reinstatement premiums	(43)
Increased net premiums earned from business growth	327
2012 net premiums earned	3,604

The underlying growth in net premiums earned during 2012 was US$327 million or 9 per cent, after adjusting for the increased reinsurance expenditure and the decrease in reinstatement premiums.

The Group expects that net earned premiums will grow broadly in line with gross premiums written in 2013 under normal circumstances.

Losses and loss expenses

The Group's loss ratio decreased to 56.0 per cent during 2012 (2011: 70.0 per cent).

The Group incurred one catastrophe loss in 2012: Sandy, which produced losses to the Group estimated at US$225 million, net of reinsurance and reinstatements. The losses created by Sandy increased the loss ratio by 7.0 percentage points.

In 2011, the Group incurred eight catastrophe losses:

· Australian floods in January;

· the New Zealand earthquakes in February and June;

· the Japan earthquake/tsunami in March;

· tornadoes which caused extensive damage in portions of the US Midwest and South in April and May;

· severe storms in Copenhagen in July;

· Hurricane Irene, which caused damage to portions of the Caribbean, United States and Canada in August; and

· the Thai floods which occurred throughout the second half of 2011.

Gross losses relating to the 2011 catastrophe losses amounted to approximately US$961 million ($678 million net of reinsurance and reinstatement premiums), impacting the 2011 loss ratio by 21.3 percentage points.

The components of the Group's loss ratio in 2012 and 2011 are analysed in the table below.

Analysis of loss ratio

	2012	2011
Attritional loss ratio	50.6%	50.0%
Catastrophe losses	7.0%	21.3%
Large single-risk losses	2.3%	1.5%
Release of reserves	(3.9%)	(2.8%)
Reported loss ratio	56.0%	70.0%

The three large single-risk losses sustained by the Group in 2012 increased the loss ratio by 2.3 percentage points (2011: 1.5 percentage points).

The Group released US$139 million from prior year loss reserves during 2012, an amount equating to 3 per cent of opening reserves (2011: US$103 million or 2 per cent). The level of reserve releases made has been broadly consistent since the Group's initial public offering in 2004.

Net underwriting contribution

The 2012 net underwriting contribution of US$788 million represents a 143 per cent increase compared with the previous year (2011: US$324 million). Of the total underwriting contribution, 67 per cent was produced by the London/UK underwriting hub; 33 per cent was produced by the Group's other underwriting hubs (2011: 74 per cent London, 26 per cent other).

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 34.0 per cent (2011: 32.6 per cent). The components of the expense ratio and corporate expenses are analysed in the table below.

Analysis of expense ratio

US$m	2012	Components of expense ratio	2011	Components of expense ratio
Policy acquisition costs	796	22.1%	759	21.0%
Administrative expenses
Controllable expenses	394	10.9%	374	10.4%
Non controllable expenses	37	1.0%	45	1.2%
Corporate expenses	155	-	85	-
Administrative and other expenses	586	11.9%	504	11.6%
	1,382	34.0%	1,263	32.6%

The policy acquisition cost ratio increased to 22.1 per cent (2011: 21.0 per cent). The majority of the increase in the policy acquisition cost ratio is related to theincrease in ceded quota share reinsurance and the way in which associated premiums and commissions are presented on the income statement. The remainder of the increase is due to a change in the mix of business written by the Group during the year.

Administrative expenses represent 11.9 percentage points of the overall expense ratio (2011: 11.6 percentage points). Overall, the increase in administrative expenses is primarily driven by growth in headcount and IT costs. The Group will continue its IT investment programme in 2013.

When calculating the expense ratio, Catlin excludes some corporate expenses - such as profit-related bonuses, employee share option schemes and certain Group corporate costs - to allow the expense and combined ratios to provide a closer representation of the costs of underwriting. Corporate expenses increased to US$155 million (2011: US$85 million); the increase is mostly due to greater provisions for profit-related bonuses and employee share schemes, in line with the Group's increased profitability during the period.

Total investment return

Total investment return amounted to 2.0 per cent (2011: 3.1 per cent). The table below summarises the total investment return during the year.

Total investment return (US$m)

	2012	2011
Total investments and cash as at 31 December	8,774	8,388

Investment income	138	156
Net gains on fixed maturities and short-term investments	48	102
Net losses on other invested assets	(13)	(2)
Total investment return	173	256
Investment expenses	(15)	(8)
Net investment return	158	248

Detailed information regarding investment performance can be found in the Investment Review.

Net (losses)/gains on foreign currency

Catlin reported a loss on foreign currency exchange amounting to US$15 million (2011: US$9 million gain). Catlin reports in US dollars but undertakes significant transactions in various currencies. Exchange rate movements during the year have resulted in the net exchange loss on these currency positions. This partly arises on the depreciation of foreign currency assets held in entities with a sterling functional currency. Gains on translating the assets of these entities into US dollars are recorded as other comprehensive income.

Financing costs

Financing costs amounted to US$14 million (2011: US$10 million). Financing costs comprise interest and other costs in respect of bank financing, together with costs of subordinated debt. Dividends relating to the non-controlling preferred stock are treated as an appropriation of net income and are not included in financing costs.

Income tax

The Group's effective tax rate was negative 2.8 per cent (2011: negative 15.6 per cent).

The negative tax rate arises from a US$19 million deferred tax benefit in the United Kingdom arising from a reduction in the carrying value of deferred tax liabilities as a result of the change in the UK corporate tax rate to 23 per cent in April 2013 from 25 per cent. The benefit is partially offset by a tax charge of US$9 million in respect of income tax on profits.

Excluding the impact of this rate change, the primary driver of the effective tax rate continues to be the jurisdiction of the underwriting entities in which profits and losses arise.

The Group's total contributions to tax authorities in the various jurisdictions in which it operates amounted to US$192 million in 2012. A breakdown of these contributions is shown in the table below.

Tax contributions (US$m)

		2012
Corporate income taxes		10
Employment and social security taxes¹		114
Insurance premium taxes² and federal excise tax		60
Irrecoverable value-added taxes		8
		192

1 A significant portion of these contributions are taxes withheld from employees' pay

2 Insurance premiums taxes are generally collected by the Group and paid to tax authorities

Approximately half of the tax contributions by the Group during 2012 were payable to UK tax authorities.

Net income available to common stockholders

After payment of dividends amounting to US$44 million to holders of Catlin Bermuda's non-cumulative perpetual preferred shares (2011: US$44 million), net income available to common stockholders amounted to US$305 million (2011: US$38 million). The return on net tangible assets was 14.6 per cent (2011: 1.7 per cent); the return on equity was 11.3 per cent (2011: 1.3 per cent).

The comprehensive income to common stockholders amounted to US$337 million (2011: US$4 million loss). Comprehensive income to common stockholders is analysed in the table below.

Statements of comprehensive income (US$m)

	2012	2011
Net income to common stockholders	305	38
Other comprehensive income/(loss)
Translation adjustments	30	(42)
Defined benefit pension plan	2	-
Total other comprehensive income/(loss)	32	(42)
Comprehensive income/(loss) to common stockholders	337	(4)

The other comprehensive gain is largely comprised of currency translation gains. These result from the significant portion of the Group's consolidated stockholders' equity being represented by non-US dollar entities such as the Catlin Syndicate and Catlin UK. A currency translation gain or loss arises when the net assets of these companies are translated at year-end into the Group's reporting currency, which is US dollars.

Balance sheet

A summary of the balance sheet at 31 December 2012 and 2011 is set out below.

Summary of Consolidated Balance Sheet (US$m)

	2012	2011	% change
Investments and cash	8,774	8,388	5%
Intangible assets and goodwill	720	717	-
Premiums and other receivables	1,838	1,679	9%
Reinsurance recoverable	1,503	1,217	24%
Deferred policy acquisition costs	464	398	17%
Other assets	742	560	33%

Loss reserves	(6,686)	(6,467)	3%
Unearned premiums	(2,552)	(2,119)	20%
Subordinated debt	(92)	(91)	1%
Reinsurance payable	(600)	(415)	45%
Other liabilities	(599)	(569)	5%
Stockholders' equity	3,512	3,298	6%

The major items on the balance sheet are analysed below.

Investments and cash

Investments and cash increased by 5 per cent to US$8.8 billion (2011: US$8.4 billion). The increase is driven by cash flow from the Group's insurance operations and positive investment performance.

Intangible assets and goodwill

The table below sets out the principal components of this asset.

Intangible assets and goodwill (US$m)

	2012	2011
Purchased Lloyd's syndicate capacity	634	634
Surplus lines licenses	6	6
Goodwill on acquisition of Wellington Underwriting plc	63	60
Other goodwill	17	17
Intangible assets and goodwill	720	717
Associated deferred tax (included within other liabilities)	(103)	(108)
Intangible assets and goodwill net of deferred tax	617	609

Premiums and other receivables

Premiums and other receivables increased during 2012 by 9 per cent to US$1.8 billion (2011: US$1.7 billion). The increase is largely in line with the increase in gross premiums written.

Reinsurance recoverable

Amounts receivable from reinsurers increased by 24 per cent to US$1.5 billion (2011: US$1.2 billion). Reinsurance recoverables represent 43 per cent of stockholders' equity (2011: 37 per cent). All current reinsurers have a financial strength rating of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral.

Deferred policy acquisition costs

Deferred policy acquisition costs represented 22 per cent of unearned premiums, net of reinsurance, at 31 December 2012 (2011: 22 per cent).

Loss reserves

Gross loss reserves have increased by 3 per cent to US$6.7 billion (2011: US$6.5 billion). Approximately 95 per cent of net reserves relate to the 2003 and later accident years. The Group released US$139 million from prior year loss reserves during 2012, an amount equal to approximately 3 per cent of opening net reserves.

Unearned premiums

Unearned premiums increased by 20 per cent to US$2.6 billion (2011: US$2.1 billion). The increase in unearned premiums is the result of Catlin's growth in gross premiums written. In 2012 premiums have incepted later in the year, which resulted in a higher proportion of unearned premiums at year end, which the Group expects will earn in 2013, as stated previously. This is further impacted by the revised accounting method in respect of US quota share gross premiums written which gives rise to increased unearned premiums.

Notes payable and subordinated debt

Subordinated debt represented a total of US$68 million and €18 million in variable rate unsecured subordinated notes. The interest payable on the notes is based on market rates for three-month deposits in US dollars plus a margin of up to 317 basis points. The notes, which were redeemable in 2011 at the earliest, qualify as 'Lower Tier II' capital under the rules of the Financial Services Authority in the UK.

There was no change to the subordinated debt during the year, and the balance sheet movement primarily represented foreign exchange revaluation.

Reinsurance payable

Reinsurance payable has increased by 45 per cent to US$600 million (2011: US$415 million). This increase relates to the increase in the amount of premiums ceded to reinsurers in 2012.

Total stockholders' equity

The table below shows the principal components of the change in total stockholders' equity during 2012 and 2011:

Change in total stockholders' equity (US$m)

	2012	2011
Total stockholders' equity, 1 January	3,298	3,448
Net income	349	82
Other comprehensive gain/(loss)	32	(42)
Common share dividends	(157)	(150)
Non-controlling preferred stock dividends	(44)	(44)
Stock compensation and other	34	4
Total stockholders' equity, 31 December	3,512	3,298

In January 2007 Catlin Bermuda issued US$600 million of non-cumulative perpetual preferred shares. Dividends are paid semi-annually at a rate of 7.249 per cent up to 2017, at which time the dividends become payable at a floating rate of 2.975 per cent plus three-month LIBOR. These shares represent a capital instrument which is eligible as regulatory capital for Catlin Bermuda.

The amount attributable to non-controlling preferred stockholders is US$590 million such that the per-share amounts attributable to common shareholders are as set out in the table below.

Net tangible assets (US$m)

	2012	2011
Total stockholders' equity	3,512	3,298
Less: attributable to non-controlling preferred stock	(590)	(590)
Total common stockholders' equity	2,922	2,708
Less: intangible assets, net of tax	(617)	(609)
Net tangible assets	2,305	2,099

Book value per share (US$)	$8.32	$7.85
Book value per share (sterling)	£5.14	£5.06

Net tangible assets per share (US$)	$6.56	$6.08
Net tangible assets per share (sterling)	£4.05	£3.93

Capital

The efficient use and preservation of capital is a strategic focus of the Group. Catlin actively manages capital through market cycles to maintain an efficient level of available capital consistent with the Group's risk appetite and business plan. Catlin takes a conservative view of both available capital and required capital based on a holistic view of risk and capital management encompassing Group-wide consideration of all risks.

Catlin controls downside risk to capital created by its diversified portfolio of underwriting and financial markets risk to ensure that the Group and all of its insurance carriers can benefit from the improved pricing environment in years following significant market events without necessarily raising additional capital. The delivery of this strategy is supported by a robust risk and control framework.

Catlin's risk appetite is a function of expected profit and available capital. In setting risk appetite, it is recognised that there will be a trade-off between expected profit, risk to capital and the time horizon under consideration across all risk categories (underwriting risk, reserving risk, financial markets risk, credit risk, operational risk).

One of Catlin's key aims is consistency and transparency of risk management and controls across the entire Group, its insurance carriers and all risk categories. Catlin controls its exposure via:

• a diversified portfolio of underwriting and financial markets risks;

• restricting aggregation;

• exercising controls on key risks; and

• risk mitigation of key underwriting and financial markets risks.

Catlin's rated underwriting entities 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 framework and level of capital. Standard & Poor's has also rated Catlin's Enterprise Risk Management programme as 'Strong'.

Shareholders' equity forms the backbone of the Group's capitalisation, complemented by the non-cumulative perpetual preferred shares issued by Catlin Bermuda. The preferred shares are a capital instrument which is eligible as regulatory capital for Catlin Bermuda. At the same time, Catlin's centrally managed outwards reinsurance/risk transfer programme reduces volatility and further enhances overall capital efficiency.

Available capital

Catlin defines available capital as its net tangible assets and the perpetual preferred shares issued by Catlin Bermuda. The Group does not consider intangible assets, subordinated debt and existing banking facilities when determining its risk appetite. Whilst there are many methods that can be used to calculate available capital, the Group believes that its method is the most appropriate from an investor's point of view.

The Group's capital position at 31 December 2012 and 2011 is analysed in the table below.

Capital position (US$m)

	2012	2011
Paid-up capital (net of intangibles)	2,305	2,099
Catlin Bermuda preferred shares	590	590
Available capital	2,895	2,689

Required economic capital¹	2,539	2,362
Capital buffer to required economic capital	356	327
Capital buffer as % of required economic capital	14%	14%

Additional resources not included in calculation of available capital
Subordinated debt	92	91
Undrawn bank facilities	391	425

1 Required economic capital represents management's view of the capital required to deliver the Group's strategy, based on the Group's internal capital model.

The Group strives to maintain a buffer of available capital that is between 10 per cent and 20 per cent of required economic capital.

Management's estimate of required economic capital is based on a portfolio view of risk, rather than singular events. It takes into account all types of risks - underwriting risk, reserving risk, financial markets risk, credit risk and operational risk - that are faced by the Group. The required economic capital is set at a level that would allow Catlin to continue to trade forward following a 1-in-100-year 'portfolio' event (that could include all of the types of risks listed above) and to benefit from the improved pricing environment in subsequent years following extreme market losses, without necessarily raising capital. This has previously been characterised by management as broadly equivalent to two 1-in-100-year insurance events (for example, a 1-in-100 year windstorm event followed by a 1-in-100-year earthquake event occurring in the same year).

Catlin utilises a sophisticated bespoke internal capital model to analyse capital requirements and to maximise capital efficiency. The model, which has been under continuous development by the Group since 2003, provides a stochastic analysis of all material risks embedded in the business. It allows the Group to model the risk profile of the Group and efficiencies of different underwriting, investment and outwards reinsurance strategies. The model also helps the Group manage capital requirements for its insurance carriers and fulfil regulatory requirements.

Third-party capital

The Group has put in place a number of strategic third-party capital arrangements. Catlin's flexible capital structure has allowed it to easily introduce these arrangements, which the Group believes benefit both Catlin and the counterparties.

Three Special Purpose Syndicates were established at Lloyd's for 2012 that provide whole-account quota share reinsurance to the Catlin Syndicate 2003. Two of the Special Purpose Syndicates have expanded their capacity for 2013, increasing the total capacity supplied by 20 per cent. The Special Purpose Syndicates and their capacities for 2012 and 2013 are shown in the table below.

Special Purpose Syndicates providing third-party capital in 2012 and 2013 (£m)

Syndicate number	Counterparty	2013 syndicate capacity	2012 syndicate capacity
2088	China Reinsurance (Group) Corporation	50	50
6111	Lloyd's Names	86	60
6112	Everest Reinsurance Company	29	27
		165	137

Converted to US dollars, the aggregate capacity of the three Special Purpose Syndicates will increase in 2013 to US$267 million (2011: US$222 million).

The Group received US$14 million in commissions and fees in 2012 relating to the Special Purpose Syndicates (2011: nil).

The Group has in place Adverse Development Cover that provides protection against the deterioration, subject to limits, of loss reserves relating to the Group's 2010 and prior underwriting years. The purchase of this coverage does not represent a change in the Group's reserving philosophy, but rather is intended to improve the efficiency of the Group's capital.

The third-party capital arrangements benefit the Group in several ways, including by:

· increasing book value through fees for management expenses and commissions for profitable underwriting;

· providing the Group with the flexibility to respond quickly to changing market circumstances, such as advantageous market conditions following a significant catastrophe event;

· reducing total volatility of earnings for first-party capital relative to business volumes;

· more efficient capital provision, particularly through the adverse development cover; and

· facilitating the transfer of knowledge between the Group and participating counterparties in areas of mutual benefit.

These arrangements increase the flexibility of the capital structure and enhance the Group's strategic options for greater use when market circumstances warrant.

The premiums ceded to the Special Purpose Syndicates and the cost of the Adverse Development Cover are included in reinsurance premiums ceded in the Group's Consolidated Statements of Operations.

Catlin proactively searches for lower-cost sources of capital, including other potential third-party capital structures.

Regulatory requirements

Catlin is committed to full compliance with Group and local regulatory requirements in all relevant jurisdictions in which 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-managed syndicates at Lloyd's and Catlin UK (Catlin Insurance Company (UK) Ltd.) will be subject to the proposed Solvency II regulatory framework, although the date of implementation remains unclear. 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.

Reinsurance and risk transfer

The goals of Catlin's risk transfer programme are to reduce volatility with a focus on capital preservation and flexibility following major events or significant market corrections. The programme is viewed as a capital management tool and is designed and executed centrally in order to maximise effectiveness.

The Group purchases reinsurance to limit various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Group's reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Group for claims.

The key elements of the risk transfer programme include:

· risk transfer to capital markets and/or collateralised counterparties to diversify and improve counterparty financial security particularly for infrequent catastrophe or extreme loss scenarios;

· non-proportional event and aggregate protection to reduce the impact of large and/or more frequent significant events;

· proportional and facultative protection to enhance the Group's gross underwriting capacity and cycle management; and

· consideration of the quality of security and willingness to pay.

Under the current risk transfer programme, recoveries are generally more likely in the second half of any calendar year as the programme is structured to reduce volatility of a full calendar year. Although some protection is purchased against single events, the core of the current programme is a Catastrophe Aggregate Programme that is structured to protect the Group against an aggregation of significant catastrophe losses (with a focus on natural perils) from major zones. Once the aggregate of losses to the Group reaches a certain level, a significant portion of further losses are recoverable from the programme up to certain limits.

The Catastrophe Aggregate Programme was first triggered in 2011 following the unprecedented series of major catastrophe events, although similar structures have been in place for prior years. The 2012 Catastrophe Aggregate Programme is not expected to be triggered from the events of 2012.

The core risk transfer programme structure is reviewed at least annually and could change materially in future years. The actual structure will depend on market availability and a consideration of the cost and benefits afforded by the programme. The overall 2013 programme provides similar levels of protection compared with recent years.

The Group evaluates the financial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All reinsurers on our current programme have financial strength rating of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral.

The Group actively considers and monitors the insurance-linked securities market and may sponsor such transactions when appropriate.

The Group believes that its risk transfer philosophy maximises book value growth over time by retaining expected earnings variability and transferring extreme volatility.

Aggregate management

Catlin underwrites classes of catastrophe-exposed business. The Group uses sophisticated modelling tools to manage 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 and are shown in the table below.

This output is used to monitor the Group's risk appetite, as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and as a key consideration in the assessment of required capital.

Examples of catastrophe threat scenarios

Outcomes derived as at 1 October 2012 on a single loss basis
(i.e. net losses for individual threat scenarios are not additive)

US$m	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000

Catlin Group
Gross loss	758	953	1,256	612	569
Reinsurance effect¹	(335)	(595)	(1,039)	(125)	(115)
Modelled net loss	423	358	201	487	454

Modelled net loss as a percentage of available capital²	15%	13%	7%	17%	16%

1 The Gulf of Mexico Windstorm scenario has been adjusted to allow for expected non-renewal of certain outwards reinsurance protections for 2013. Prior to the adjustment the loss scenario would have been 5 per cent (US$147 million).

2 Available capital amounted to US$2.8 billion at 30 June 2012.

Limitations

The modelled outcomes in the table above 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.

Investments

Total return on Catlin's average cash and investments of US$8.6 billion during 2012 amounted to 2.0 per cent (2011: 3.1 per cent). Total investment return amounted to US$173 million (2011: US$256 million). The performance was in line with the Group's expectations given the historic low interest rate environment and continued global economic uncertainty during the year.

The Group's investment portfolio benefited from mark to market gains on fixed income securities. However, in the light of continued uncertainty both in Europe and the United States in respect of fundamentals and potential Government intervention, Catlin continued to actively manage the portfolios by selectively reducing exposure to sectors where the risk and/or liquidity premium did not meet the Group's criteria, whilst adding to sectors that offered an appropriate trade-off. The Group also continued to protect the investment portfolio against rising interest rates, extreme credit events and equity market volatility through the use of overlays.

Investment performance

The Group's total investment return is analysed in the table below.

Contribution to total investment return (US$m)

	2012	2011
Investment income	$138	$156
Net gains on investments	35	100
Total investment return	173	256

Investment performance in 2012 is analysed by major asset category in the table below.

Investment performance by major asset category (US$m)

	31 Dec 2012 allocation	2012 average allocation	2012 average allocation %	Return	Return %
Fixed income	5,603	5,811	68%	146	2.5%
Cash & short-term investments	2,597	2,420	28%	32	1.3%
Other invested assets	574	372	4%	(5)	(1.3%)
Total	8,774	8,603	100%	173	2.0%

The return on the fixed income portfolio reflects interest income, unrealised gains from lower interest rates over the course of 2012 as well as spread movements on corporate bonds and mortgage-backed securities. The return is stated net of performance on overlays. The in-house managed core portfolios outperformed the externally managed core portfolios, and in addition there was a strong return of more than 20 per cent from the tactical fixed income portfolios managed externally.

The return on the other invested assets reflects interest, dividends, and realised and unrealised gains on funds, public equities, loans and private equity, and related overlays. During the year the Group increased its exposure to equities and loans, which delivered a positive return. This was offset by overlay costs which in aggregate resulted in a loss on other invested assets.

Portfolio management and positioning

Catlin's total cash and investments increased by 5 per cent during 2012 to US$8.8 billion (2011: US $8.4 billion).

The Group's investment team now comprises 23 professionals who, together with systems and processes implemented in recent years, enable Catlin to manage a portion of the investment portfolio in-house. At 31 December 2012, US$3.2 billion of fixed income securities was managed by the in-house team. A further US$519 million in assets was under management by the in-house special situations team, whilst US$257 million in assets was under management with specialist tactical fixed income managers.

Given the historically low interest rates during 2012, the Group reduced its exposure during the year to US Government securities from 20 per cent to 9 percent of cash and investments. Exposure to covered bonds was increased during the year to 5 per cent of cash and investments (2011: 2 per cent) as these securities offered better risk adjusted returns.

Opportunities to make investments with a longer-term horizon, capture liquidity premium and benefit from dislocations were identified during the year by the in-house special situations team, and investments were made in selected equities and loans which were protected by overlays.

The Group's investment portfolio remains liquid and conservatively positioned in the light of continued global economic uncertainty. Cash, cash equivalents and short-term investments accounted for 30 per cent of the portfolio at 31 December 2012 (2011: 26 per cent). Forty-four per cent of these investments is held in money market funds and short-term bonds, 33 per cent is held in bank deposits, and the remainder is managed by Lloyd's in respect of regulatory overseas deposits.

Liquid assets - which are defined as cash, government securities and fixed income securities with less than six months until maturity - accounted for 57 per cent of the portfolio (2011: 62 per cent).

The other invested assets comprise US$574 million relating to direct investments in equities, bonds and loans managed by the in-house team, co-investments with select investment partners, and US$44 million of hedge funds for which redemption notices have been issued.

The Group's asset allocation to fixed income investments decreased to 64 per cent of total cash and investments (2011: 72 per cent). A breakdown by sector is shown in the table below.

Detailed asset allocation (%)

	2012	2011
Fixed income investments
US government and agency securities	9%	20%
Non-US government and agency securities	17%	16%
Agency mortgage-backed securities	9%	9%
FDIC-backed corporate bonds	-	1%
Asset-backed securities	8%	7%
Covered bonds	5%	2%
Corporate bonds	15%	15%
Commercial mortgage-backed securities	1%	1%
Non-agency mortgage-backed securities	*	1%
	64%	72%
Cash and short-term investments	30%	26%
Other invested assets	6%	2%
Total	100%	100%

*Less than 0.5 per cent

Asset quality

Catlin's fixed income portfolio at 31 December 2012 consisted of high-quality assets, with 97 per cent of the portfolio invested in government/agency securities or instruments rated 'A' or higher (2011: 98 per cent). The quality of the Group's fixed income portfolio is analysed in the table below.

Fixed income investments by rating at 31 December 2012 (US$m)

	Government/ agency	AAA	AA	A	BBB	Non Inv grade	Assets
US government & agencies	14%	--	--	--	--	--	807
Non-US government & agencies	27%	--	--	--	--	--	1,503
Agency mortgage-backed securities	14%	--	--	--	--	--	766
Asset-backed securities	--	12%	--	--	*	*	675
Covered bonds	--	7%	--	--	--	--	409
Corporate bonds	--	1%	10%	12%	*	*	1,318
Commercial mortgage-backed securities	--	--	--	*	*	1%	88
Non-agency mortgage-backed securities	--	*	*	--	--	*	38
Total	55%	20%	10%	12%	1%	2%	5,604

* Less than 0.5 per cent

The Group did not have any direct sovereign exposure to the governments of Portugal, Italy, Ireland, Greece and Spain in its investment portfolio at 31 December 2012.

Duration positioning

The duration of the Group's insurance liabilities was 2.8 years at 31 December 2012, which resulted in a liability benchmark duration (including shareholders' funds and new business cash flows) of 2.7 years. The duration of the fixed income portfolio at 31 December 2012 was 2.4 years (2011: 2.5 years). The duration of total cash and investments was 1.7 years (2011: 1.8 years) and therefore was short of the liability benchmark. The duration of the portfolio was kept short of the liability benchmark in the expectation that interest rates will eventually rise. Overlays were put in place to protect the portfolio against significant movements in interest rates and to manage credit risks actively.

The yield to maturity on the fixed income portfolio was 1.2 per cent at 31 December 2012 (2011: 1.4 per cent).

Investment strategy

The Group's investment portfolio at 31 December 2012 reflects the investment strategy that was initiated during 2010. This strategy aims to maximise economic value whilst minimising downside risk to capital and considering earnings volatility. The investment strategy operates within a comprehensive market risk framework that is based on capital, liquidity and risk-adjusted returns and is independently overseen by Catlin's Enterprise Risk Management team.

Under this strategy, a significant majority of Catlin's investments comprise a core portfolio of highly rated sovereign, agency and corporate bonds and AAA-rated short-duration asset-backed securities. The core portfolio is aligned with the profile of the Group's liabilities and managed by a select group of external managers and the in-house team. Ninety-six per cent of fixed income investments were managed under the Group's core investment guidelines at 31 December 2012.

Tactical investments are implemented through a select group of specialist managers as well as an in-house special situations team established to pursue a concentrated portfolio of primarily corporate investments across the capital structure on a partially hedged basis.

Catlin will pursue opportunities, as they arise, that exploit the Group's high levels of liquidity and its balance sheet capacity to invest with a longer-term horizon, capture liquidity premium and benefit from dislocations.

The Group currently uses overlays to manage portfolio and macro-economic risks efficiently. As at 31 December 2012, the Group had in place options which provide protection in the event of a significant movement in interest rates during 2013 and to provide protection against significant levels of credit spread widening. The overlay positions are reviewed and adjusted to control the overall risk position of the investment portfolio.

Outlook

The Group maintains a cautious view of the risk/reward relationship in the high-grade fixed income market and in the light of the low volatility levels in financial markets. However, it is confident that the in-house capabilities established over the past three years provide a strong platform to actively manage portfolio risks, capture risk and liquidity premiums on a systematic basis, and provide the Group with better real time insights into market developments. In addition, the Group will continue to build on its successful cooperation with a small group of third-party specialist mangers in selected sectors and asset markets as risk/reward opportunities arise.

Catlin's investment strategy will continue to focus on capital preservation. The Group will continue to seek opportunities that offer attractive risk-adjusted returns whilst maintaining the flexibility to capitalise on dislocations that may occur amid ongoing uncertainty in financial markets. Whilst interest rates are expected to remain at historic low levels for an extended period, the Group's portfolio is well-positioned to perform under a variety of economic scenarios.

Loss Reserve Development

Catlin adopts a consistent reserving philosophy from year-to-year, taking into account the inherent uncertainties in estimating insurance liabilities.

· case reserves for known but unpaid claims as at the balance sheet date;

· incurred but not reported ('IBNR') reserves for claims where the insured event has occurred but has not been reported to the Group as at the balance sheet date; and

· loss adjustment expense reserves for the expected handling costs of settling the claims.

The process of establishing reserves is both complex and imprecise, requiring the use of informed estimates and judgments. Reserves for losses and loss expenses are established based on amounts reported from insureds or ceding companies and according to generally accepted actuarial principles. Reserves are based on a number of factors including experience derived from historical claim payments and actuarial assumptions. Such assumptions and other factors include, but are not limited to:

· the effects of inflation;

· estimation of underlying exposures;

· changes in the mix of business;

· amendments to wordings and coverage;

· the impact of major events;

· movements in industry benchmarks;

· the incidence of incurred claims;

· the extent to which all claims have been reported;

· changes in the legal environment;

· damage awards; and

· changes in both internal and external processes which might accelerate or slow down both reporting and settlement of claims.

The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in earnings in the period in which the estimates are changed.

The Group receives independent external actuarial analysis of its reserving requirements annually.

The loss reserves are not discounted for the time value of money apart from on a minimal amount of individual claims.

Estimate of reinsurance recoveries

The Group's estimate of reinsurance recoveries is based on the relevant reinsurance programme in place for the calendar year in which the related losses have been incurred. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim reserves associated with the reinsured policy. An estimate for potential reinsurance failure and possible disputes is provided to reduce the carrying value of reinsurance assets to their net recoverable amount.

Development of reserves for losses and loss expenses

Catlin believes that presentation of the development of net loss provisions by accident period provides greater transparency than presenting on an underwriting year basis that will include estimates of future losses on unearned exposures. However, due to certain data restrictions, some assumptions and allocations are necessary. These adjustments are consistent with the underlying premium earning profiles.

The loss reserve triangles below show how the estimates of ultimate net losses have developed over time. The development is attributable to actual payments made and to the re-estimate of the outstanding claims, including IBNR. The development is shown including and excluding certain major events as detailed below. Development over time of net paid claims is also shown, including and excluding these major events.

All historic premium and claim amounts have been restated using exchange rates as at 31 December 2012 for the Group's functional currencies to remove the distorting effect of changing rates of exchange as far as possible.

Wellington acquisition

The business combination resulting from the acquisition of Wellington Underwriting plc was deemed effective 31 December 2006 for accounting purposes; accordingly the net assets acquired are valued as at that date. In the tables below the Wellington reserves arising from the transaction for events occurring prior to 31 December 2006 are shown from the date of the business combination. Premium and reserves relating to business written by Wellington prior to the business combination but earned during future calendar years are included within those accident years for the Group.

For the 2007 underwriting year, the Group in effect purchased the remaining Lloyd's capacity relating to the business previously underwritten by third-party Lloyd's Names participating on Wellington Syndicate 2020. Since the closure of the 2006 underwriting year, by way of reinsurance to close, the Group has been responsible for 100 per cent of the liabilities of Syndicate 2020.

Since 31 December 2006 the Wellington reserves have been set consistent with Catlin's reserving philosophy, and Wellington is included within the scope of work undertaken by the Group's external actuarial advisor.

Highlights

In aggregate, across most accident years, reserves have developed slightly better than the assessments made at the previous year-end. The reserves from the 2002 and prior accident years represent 3 per cent of the Group's net reserves at 31 December 2012. A summary of the Group's net reserves is shown in the table below.

Summary of Catlin Group net reserves at 31 December 2012 (US$m)

Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	Percentage of total net reserves
2002 and prior	71	105	177	3%
2003	25	38	63	1%
2004	31	45	76	1%
2005	61	90	150	3%
2006	51	76	126	2%
2007	206	18	225	4%
2008	286	3	289	6%
2009	633		633	12%
2010	776		776	15%
2011	1,098		1,098	21%
2012	1,587		1,587	30%
Sub-total	4,825	375	5,200	98%
Other net reserves¹			86	2%
Total net reserves			5,286	100%

1 Other net reserves include unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and Life business

Commentary on development tables

· Non-major events: Prior year improvements in Wellington, 2009 and 2010 accident years is primarily due to favourable experience on the Aviation and Energy accounts. 2011 accident year deterioration is mainly as a result of a removal of wreck claim and a cargo loss from the Middle East and North Africa unrest.

· Major events: Deterioration in major events in 2011 has been limited by recoveries on the Catastrophe Aggregate Programme.

Limitations

Establishing insurance reserves requires the estimation of future liabilities which depend on numerous variables. As a result, whilst reserves represent a good faith estimate of those liabilities, they are no more than an estimate and are subject to uncertainty. It is possible that actual losses could materially exceed reserves.

Whilst the information in the tables above provides a historical perspective on the changes in the estimates of the claims liabilities established in previous years and the estimated profitability of recent years, readers are cautioned against extrapolating future surplus or deficit on the current reserve estimates. The information may not be a reliable guide to future profitability as the nature of the business written might change, reserves may prove to be inadequate, the reinsurance programme may be insufficient and/or reinsurers may fail or be unwilling to pay claims due.

Management considers that the loss reserves and related reinsurance recoveries continue to be held at their best estimate based on the information currently available. However, the ultimate liability will vary as a result of inherent uncertainties and may result in significant adjustments to the amounts provided. There is a risk that, due to unforeseen circumstances, the reserves carried are not sufficient to meet ultimate liabilities.

The accident year triangles were constructed using several assumptions and allocation procedures which are consistent with underlying premium earning profiles. Although we believe that these allocation techniques are reasonable, to the extent that the incidence of claims does not follow the underlying assumptions, our allocation of losses to accident year is subject to estimation error.

Events included in the major events sections of loss development triangles

Accident year	Event
2002 & prior	World Trade Centre/US Terrorism 9/11
2004	Hurricane Charley
2004	Hurricane Frances
2004	Hurricane Ivan
2004	Hurricane Jeanne
2005	Hurricane Katrina
2005	Hurricane Rita
2005	Hurricane Wilma
2008	Hurricane Ike
2010	Chilean Earthquake
2010	Deepwater Horizon
2010	New Zealand Earthquake, Darfield
2010	Australian Floods, Central Queensland
2011	Australian Floods, Brisbane
2011	New Zealand Earthquake, Christchurch
2011	Japanese Earthquake
2011	Tuscaloosa Tornadoes
2011	Joplin Tornado
2011	New Zealand Earthquake, Sumner
2011	Hurricane Irene
2011	Danish Cloudburst
2011	Thai Floods
2012	Costa Concordia
2012	Windstorm Sandy

Development tables
Estimated ultimate net losses (US$m)

						Accident year
	Wellington accident periods 2006 and prior		2002 and prior	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	Total
Net premiums earned				938	1,178	1,209	1,349	2,746	2,559	2,928	3,231	3,612	3,604

Net ultimate excluding major events
Initial estimate¹	6,011		1,566	429	553	598	641	1,386	1,552	1,818	1,683	1,834	1,830
One year later	5,979		1,584	413	487	540	599	1,441	1,527	1,789	1,661	1,855
Two years later	5,889		1,596	385	465	497	585	1,422	1,525	1,771	1,608
Three years later	5,877		1,638	385	438	476	570	1,414	1,502	1,735
Four years later	5,791		1,652	374	427	471	564	1,418	1,490
Five years later	5,781		1,654	371	433	464	564	1,412
Six years later	5,717		1,668	375	424	466	561
Seven years later			1,660	362	418	463
Eight years later			1,657	359	412
Nine years later			1,645	350
Net ultimate loss ratio excluding major events
Initial estimate¹				45.7%	46.9%	49.5%	47.5%	50.5%	60.6%	62.1%	52.1%	50.8%	50.8%
One year later				44.0%	41.4%	44.7%	44.4%	52.5%	59.7%	61.1%	51.4%	51.4%
Two years later				41.1%	39.5%	41.1%	43.3%	51.8%	59.6%	60.5%	49.8%
Three years later				41.0%	37.2%	39.3%	42.2%	51.5%	58.7%	59.3%
Four years later				39.8%	36.3%	39.0%	41.8%	51.6%	58.2%
Five years later				39.6%	36.8%	38.4%	41.8%	51.4%
Six years later				39.9%	36.0%	38.6%	41.6%
Seven years later				38.6%	35.5%	38.3%
Eight years later				38.2%	35.0%
Nine years later				37.4%
Net ultimate major events
Initial estimate¹			20		116	334			274		288	782	310
One year later			20		117	386			286		284	804
Two years later			19		118	397			288		296
Three years later			19		117	401			284
Four years later			20		121	394			285
Five years later			28		120	412
Six years later			25		120	409
Seven years later			19		120	414
Eight years later			17		120
Nine years later			20
Net ultimate including major events
Initial estimate¹	6,011		1,585	429	668	932	641	1,386	1,825	1,818	1,971	2,616	2,140
One year later	5,979		1,603	413	604	926	599	1,441	1,813	1,789	1,945	2,659
Two years later	5,889		1,615	385	583	894	585	1,422	1,813	1,771	1,904
Three years later	5,877		1,657	385	555	876	570	1,414	1,786	1,735
Four years later	5,791		1,672	374	548	865	564	1,418	1,775
Five years later	5,781		1,682	371	553	876	564	1,412
Six years later	5,717		1,692	375	543	876	561
Seven years later			1,679	362	538	876
Eight years later			1,674	359	532
Nine years later			1,665	350
Net ultimate loss ratio including major events
Initial estimate¹				45.7%	56.7%	77.2%	47.5%	50.5%	71.3%	62.1%	61.0%	72.4%	59.4%
One year later				44.0%	51.3%	76.6%	44.4%	52.5%	70.8%	61.1%	60.2%	73.6%
Two years later				41.1%	49.5%	74.0%	43.3%	51.8%	70.9%	60.5%	58.9%
Three years later				41.0%	47.1%	72.5%	42.2%	51.5%	69.8%	59.3%
Four years later				39.8%	46.6%	71.5%	41.8%	51.6%	69.4%
Five years later				39.6%	47.0%	72.5%	41.8%	51.4%
Six years later				39.9%	46.2%	72.5%	41.6%
Seven years later				38.6%	45.7%	72.5%
Eight years later				38.2%	45.2%
Nine years later				37.4%

Cumulative net paid		5,363	1,594	325	501	816	510	1,187	1,486	1,102	1,128	1,561	553	16,127
Estimated net ultimate claims		5,717	1,665	350	532	876	561	1,412	1,775	1,735	1,904	2,659	2,140	21,328
Estimated net claim reserves		354	71	25	31	61	51	225	289	633	776	1,098	1,587	5,200
Other net reserves²														86
Booked reserves														5,286

1 Initial estimates for 2002 and prior shown as at 31 December 2003; initial estimates for Wellington accident periods 2006 and prior are shown as at the date of business combination

2 Other net reserves include unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and Life business.

Net paid losses (US$m)

		Accident Year
	Wellington accident periods 2006 and prior	2002 and prior	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Net premiums earned			938	1,178	1,209	1,349	2,746	2,559	2,928	3,231	3,612	3,604

Net paid excluding major events
End of accident year¹	3,839	1,103	96	129	121	158	356	316	365	411	456	504
One year later	4,195	1,231	173	225	228	270	593	683	711	719	923
Two years later	4,646	1,324	230	284	291	360	885	952	925	935
Three years later	5,020	1,379	259	316	349	420	1,035	1,063	1,102
Four years later	5,202	1,442	284	341	378	460	1,130	1,186
Five years later	5,321	1,478	308	359	395	490	1,187
Six years later	5,363	1,525	303	371	412	510
Seven years later		1,550	314	379	411
Eight years later		1,577	322	381
Nine years later		1,575	325
Net paid loss ratio excluding major events
End of accident year¹			10.3%	10.9%	10.0%	11.7%	13.0%	12.3%	12.5%	12.7%	12.6%	14.0%
One year later			18.4%	19.1%	18.9%	20.0%	21.6%	26.7%	24.3%	22.2%	25.6%
Two years later			24.5%	24.1%	24.1%	26.7%	32.2%	37.2%	31.6%	28.9%
Three years later			27.6%	26.8%	28.9%	31.2%	37.7%	41.5%	37.6%
Four years later			30.3%	29.0%	31.3%	34.1%	41.1%	46.4%
Five years later			32.8%	30.5%	32.7%	36.3%	43.2%
Six years later			32.3%	31.5%	34.1%	37.8%
Seven years later			33.5%	32.1%	34.0%
Eight years later			34.4%	32.4%
Nine years later			34.6%
Net paid major events
End of accident year¹		8		72	94			101		81	284	49
One year later		13		113	248			193		158	638
Two years later		15		116	347			251		193
Three years later		19		117	378			273
Four years later		19		119	394			300
Five years later		21		120	399
Six years later		21		120	402
Seven years later		20		120	405
Eight years later		17		120
Nine years later		19
Net paid including major events
End of accident year¹	3,839	1,111	96	200	215	158	356	416	365	491	740	553
One year later	4,195	1,243	173	338	476	270	593	876	711	877	1,561
Two years later	4,646	1,339	230	400	639	360	885	1,204	925	1,128
Three years later	5,020	1,398	259	433	726	420	1,035	1,336	1,102
Four years later	5,202	1,461	284	460	772	460	1,130	1,486
Five years later	5,321	1,499	308	479	794	490	1,187
Six years later	5,363	1,547	303	491	814	510
Seven years later		1,570	314	499	816
Eight years later		1,593	322	501
Nine years later		1,594	325
Net paid loss ratio including major events
End of accident year¹			10.3%	17.0%	17.8%	11.7%	13.0%	16.3%	12.5%	15.2%	20.5%	15.4%
One year later			18.4%	28.7%	39.4%	20.0%	21.6%	34.2%	24.3%	27.1%	43.2%
Two years later			24.5%	33.9%	52.8%	26.7%	32.2%	47.0%	31.6%	34.9%
Three years later			27.6%	36.8%	60.1%	31.2%	37.7%	52.2%	37.6%
Four years later			30.3%	39.1%	63.9%	34.1%	41.1%	58.1%
Five years later			32.8%	40.6%	65.7%	36.3%	43.2%
Six years later			32.3%	41.7%	67.3%	37.8%
Seven years later			33.5%	42.4%	67.5%
Eight years later			34.4%	42.6%
Nine years later			34.6%

1 End of accident year for 2002 and prior shown as at 31 December 2003; end of accident year for Wellington accident periods 2006 and prior are shown as at the date of business combination

Catlin Group Limited

Consolidated Balance Sheets

As at 31 December 2012 and 2011

(US dollars in millions)

	2012	2011
Assets
Investments Fixed maturities, at fair value	$5,603	$6,029
Short-term investments, at fair value	123	115
Other invested assets	574	181
Total investments	6,300	6,325

Cash and cash equivalents	2,474	2,063
Accrued investment income	37	39
Premiums and other receivables	1,838	1,679
Reinsurance recoverable on unpaid losses (net of bad debts)	1,400	1,188
Reinsurance recoverable on paid losses	103	29
Reinsurers' share of unearned premiums	466	286
Deferred policy acquisition costs	464	398
Intangible assets and goodwill	720	717
Unsettled trades receivable	4	55
Other assets	235	180
Total assets	$14,041	$12,959

Liabilities and stockholders' equity
Liabilities
Reserves for losses and loss expenses	$6,686	$6,467
Unearned premiums	2,552	2,119
Reinsurance payable	600	415
Accounts payable and other liabilities	371	301
Subordinated debt	92	91
Unsettled trades payable	43	66
Deferred tax liability (net)	185	202
Total liabilities	$10,529	$9,661

The accompanying notes are an integral part of the consolidated financial statements

	2012	2011
Stockholders' equity
Common stock	$4	$4
Additional paid-in capital	1,961	1,959
Treasury stock	(73)	(105)
Accumulated other comprehensive loss	(194)	(226)
Retained earnings	1,224	1,076
Total common stockholders' equity	2,922	2,708
Non-controlling interest in preferred stock of consolidated subsidiary	590	590
Total stockholders' equity	3,512	3,298
Total liabilities and stockholders' equity	$14,041	$12,959

The accompanying notes are an integral part of the consolidated financial statements.

Approved by the Board of Directors on 7 February 2013

Stephen Catlin

Director

Benjamin Meuli

Director

Catlin Group Limited

Consolidated Income Statements

For the years ended 31 December 2012 and 2011

(US dollars in millions, except per share amounts)

	2012	2011
Revenues
Gross premiums written	$4,972	$4,513
Reinsurance premiums ceded	(1,138)	(678)
Net premiums written	3,834	3,835
Change in net unearned premiums	(230)	(223)
Net premiums earned	3,604	3,612
Net investment return	158	248
Net (losses)/gains on foreign currency	(15)	9
Other income	8	4
Total revenues	3,755	3,873

Expenses
Losses and loss expenses	2,020	2,529
Policy acquisition costs	796	759
Administrative and other expenses	586	504
Financing costs	14	10
Total expenses	3,416	3,802
Net income before income tax	339	71
Income tax benefit	10	11
Net income	349	82
Non-controlling preferred stock dividend	(44)	(44)
Net income to common stockholders	$305	$38

Earnings per common share
Basic	$0.88	$0.11
Diluted	$0.83	$0.11

The accompanying notes are an integral part of the consolidated financial statements.

Catlin Group Limited

Consolidated Statements of Comprehensive Income

For the years ended 31 December 2012 and 2011

(US dollars in millions)

	2012	2011
Net income to common stockholders	$305	$38
Other comprehensive income/(loss), net of tax
Translation adjustments	30	(42)
Defined benefit pension plan	2	-
Total other comprehensive income/(loss)	32	(42)
Comprehensive income/(loss) to common stockholders	$337	$(4)

Catlin Group Limited

Consolidated Statements of Changes in Stockholders' Equity

For the years ended 31 December 2012 and 2011

(US dollars in millions)

The accompanying notes are an integral part of the consolidated financial statements.

	Common stock	Additional paid-in capital	Treasury stock	Accumulated other comprehensive loss	Retained earnings	Non-controlling preferred stock	Total stockholders' equity
Balance 1 January 2011	$4	$1,955	$(105)	$(184)	$1,188	$590	$3,448
Net income to common stockholders	-	-	-	-	38	-	38
Other comprehensive loss	-	-	-	(42)	-	-	(42)
Stock compensation expense	-	10	-	-	-	-	10
Stock options exercised	-	1	-	-	-	-	1
Dividends	-	-	-	-	(150)	-	(150)
Treasury stock purchased	-	-	(7)	-	-	-	(7)
Distribution of treasury stock held in Employee Benefit Trust	-	(7)	7	-	-	-	-
Balance 31 December 2011	$4	$1,959	$(105)	$(226)	$1,076	$590	$3,298

Net income to common stockholders	-	-	-	-	305	-	305
Other comprehensive income	-	-	-	32	-	-	32
Stock compensation expense	-	29	-	-	-	-	29
Stock options exercised	-	3	-	-	-	-	3
Dividends	-	-	-	-	(157)	-	(157)
Distribution of treasury stock held in Employee Benefit Trust	-	(30)	32	-	-	-	2
Balance 31 December 2012	$4	$1,961	$(73)	$(194)	$1,224	$590	$3,512

The accompanying notes are an integral part of the consolidated financial statements.

Catlin Group Limited

Consolidated Statements of Cash Flows

For the years ended 31 December 2012 and 2011

(US dollars in millions)

	2012	2011
Cash flows provided by operating activities
Net income	$349	$82
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	19	18
Amortisation of net discounts of fixed maturities	57	46
Net gains on investments	(34)	(100)
Changes in operating assets and liabilities:
Reserves for losses and loss expenses	137	924
Unearned premiums	407	240
Premiums and other receivables	(147)	(362)
Deferred policy acquisition costs	(61)	(46)
Reinsurance recoverable on unpaid losses	(197)	(148)
Reinsurance recoverable on paid losses	(73)	163
Reinsurers' share of unearned premiums	(174)	(11)
Reinsurance payable	176	(144)
Accounts payable and other liabilities	49	55
Deferred taxes	(15)	(36)
Other	72	(88)
Net cash flows provided by operating activities	565	593

Cash flows used in investing activities
Purchases of fixed maturities	(5,822)	(7,360)
Proceeds from sales of fixed maturities	5,967	5,743
Proceeds from maturities of fixed maturities	314	201
Net purchases, sales and maturities of short-term investments	(8)	475
Purchases of other invested assets	(652)	(74)
Proceeds from sales and redemptions of other invested assets	244	92
Net purchases and sales of property and equipment	(39)	(60)
Purchase of intangible assets	-	(3)
Net cash flows provided/(used) in investing activities	4	(986)

The accompanying notes are an integral part of the consolidated financial statements.

	2012	2011
Cash flows used in financing activities
Dividends paid on common stock	(157)	(150)
Dividends paid on non-controlling preferred stock	(44)	(44)
Purchase of treasury stock	-	(7)
Net cash flows used in financing activities	(201)	(201)
Net increase/(decrease) in cash and cash equivalents	368	(594)

Effect of exchange rate changes	43	7
Cash and cash equivalents - beginning of year	2,063	2,650
Cash and cash equivalents - end of year	$2,474	$2,063

Supplemental cash flow information
Taxes paid	$7	$26
Interest paid	$4	$4

Cash and cash equivalents comprise the following:
Cash at bank and in hand	$1,298	$1,311
Cash equivalents	$1,176	$752

The accompanying notes are an integral part of the consolidated financial statements.

Catlin Group Limited

Notes to the Consolidated Financial Statements

For the years ended 31 December 2012 and 2011

1 Nature of operations

Catlin Group Limited ('Catlin' or the 'Company') is a holding company incorporated on 25 June 1999 under the laws of Bermuda. Through its subsidiaries, which together with the Company are referred to as the 'Group', Catlin underwrites specialty classes of insurance and reinsurance on a global basis.

The Group consists of four reporting segments as described in Note 3.

The Group writes a broad range of products, including property, casualty, energy, marine and aerospace insurance and property, catastrophe and per-risk excess, non-proportional treaty, aviation, marine, casualty and motor reinsurance business. Risks are insured worldwide, although risks originating in the United States predominate. The Group currently operates from more than 55 offices in 21 countries.

2 Significant accounting policies

Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP'). The preparation of financial statements in conformity with US GAAP requires management to make estimates when recording transactions resulting from business operations based on information currently available. The most significant items on the Group's balance sheet that involve accounting estimates and actuarial determinations are reserves for losses and loss expenses, reinsurance recoverables, valuation of investments, intangible assets and goodwill. The accounting estimates are sensitive to market conditions, investment yields and other factors. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates and actual results may differ from the estimates used in preparing the consolidated financial statements, management believes the amounts recorded are reasonable.

The consolidated income statements reflect certain out-of-period adjustments, without which the 2012 net income to common stockholders would be reduced by $8 million. The impact of these items, which include an adjustment to incurred losses as described in Note 7, are not material to 2012 or 2011. As described elsewhere in this note, changes have been made to the presentation of non-controlling interests in the preferred equity of a consolidated subsidiary. In addition, certain insignificant reclassifications have been made to prior year amounts to conform to the 2012 presentation. There is no impact of these reclassifications on net income or stockholders' equity.

The Group has modified the method of recognising premiums for quota share reinsurance treaties underwritten by its US segment. This change has resulted in an increase of $94 million in gross premiums written. There has been no significant impact on the Group's net financial position or results of operations.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. With the exception of preferred stock issued by one consolidated subsidiary, the equity of all subsidiaries is wholly owned by the Company. All significant inter-company transactions and balances are eliminated on consolidation.

Reporting currency

The financial information is reported in United States dollars ('US dollars' or '$').

Fixed maturities and short-term investments

The Group has elected to apply the fair value option to its fixed maturities and short-term investments. The Group's fixed maturities and short-term investments are carried at fair value. The fair value is based on the quoted market price of these securities provided by either independent pricing services, or, when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments are composed of instruments with original maturities of more than 90 days and less than one year from the date of purchase.

Net investment return includes interest income adjusted for amortisation of premiums and discounts and is net of investment management and custodian fees. Interest income is recognised when earned. Premiums and discounts are amortised or accreted over the lives of the related securities as an adjustment to yield using the effective-interest method and amortisation is recorded in current period income. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognised prospectively.

All gains or losses on fixed maturities and short-term investments are included in net investment return in the Consolidated Income Statements.

Other invested assets

The Group's other invested assets comprise investments in funds, equity securities and loan instruments. Investees over which the Group exercises significant influence are carried at cost adjusted for the Group's share of earnings or losses and distributions. The remainder of the Group's other invested assets are carried at fair value. All income, gains and losses on other invested assets are included within net investment return in the Consolidated Income Statements.

Derivatives

The Group recognises derivative financial instruments as either assets or liabilities measured at fair value. Gains and losses resulting from changes in fair value are included in net income in the Consolidated Income Statements. None of the derivatives used are designated as accounting hedges.

The fair values of equity contracts, interest rate contracts and credit default contracts described in Note 5 are based on prices provided by independent pricing services. Any equity contracts at the balance sheet date are included in other invested assets in the Consolidated Balance Sheets. Any open interest rate contracts and credit default contracts are included in fixed maturity investments. Gains and losses resulting from change in fair value are included in net investment return in the Consolidated Income Statements.

The fair values of foreign exchange derivatives described in Note 5 are based on prices provided by counterparties. Gains and losses on foreign exchange derivatives are included in net gains/(losses) on foreign currency in the Consolidated Income Statements.

Cash and cash equivalents

Cash equivalents include all instruments with original maturities of 90 days or less.

Securities lending

The Group participates in securities lending arrangements whereby specific securities are loaned to other institutions, primarily banks and brokerage firms, for short periods of time. Under the terms of the securities lending agreements, the loaned securities remain under the Group's control and therefore remain on the Group's balance sheet. Collateral in the form of cash, government securities and letters of credit is required and is monitored and maintained by the lending agent. The Group receives interest income on the invested collateral, which is included in net investment return in the Consolidated Income Statements.

Premiums

Premiums are recorded as written at the inception of each policy and are earned over the policy period. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired risk portion of the policies in force.

Reinsurance premiums assumed are recorded at the inception of the policy and are estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts.

Reinstatement premiums receivable are recognised and fully earned as they fall due.

Policy acquisition costs

Policy acquisition costs are those costs, consisting primarily of commissions and premium taxes, which vary with and are primarily related to the production of premiums. Policy acquisition costs are deferred and amortised over the period in which the related premiums are earned.

To the extent that future policy premiums, including anticipation of interest income, are not adequate to recover all deferred policy acquisition costs ('DPAC') and related losses and loss expenses, a premium deficiency is recognised immediately by a charge to net income. If the premium deficiency is greater than unamortised DPAC, a liability will be accrued for the excess deficiency.

Reserves for losses and loss expenses

A liability is established for unpaid losses and loss expenses when insured events occur. The liability is based on the expected ultimate cost of settling the claims. The reserve for losses and loss expenses includes: (1) case reserves for known but unpaid claims as at the balance sheet date; (2) incurred but not reported ('IBNR') reserves for claims where the insured event has occurred but has not been reported to the Group as at the balance sheet date (and for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient); and (3) loss adjustment expense reserves for the expected handling costs of settling the claims.

Reserves for losses and loss expenses are established based on amounts reported from insureds or ceding companies and according to generally accepted actuarial principles. Reserves are based on a number of factors, including experience derived from historical claim payments and actuarial assumptions to arrive at loss development factors. Such assumptions and other factors include trends, the incidence of incurred claims and the extent to which all claims have been reported. The process used in establishing reserves cannot be exact, particularly for liability and catastrophe-related coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated, and any adjustments required are reflected in net income in the current year in the Consolidated Income Statements.

Reinsurance

In the ordinary course of business, the Group's subsidiaries cede premiums to other insurance companies. These arrangements allow for greater diversification of business and minimise the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve the Group of its obligations to its insureds.

Reinsurance premiums ceded and commissions thereon are recognised over the period that the reinsurance coverage is provided. Reinsurers' share of unearned premiums represents the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Reinstatement premiums payable are recognised and fully expensed as they fall due.

Reinsurance recoverables include the balances due from reinsurance companies for unpaid and paid losses and loss expenses that will be recovered from reinsurers, based on contracts in force. A reserve for uncollectible reinsurance is determined based upon a review of the financial condition of the reinsurers and an assessment of other available information.

Retroactive reinsurance

Catlin has purchased an Adverse Development Cover ('ADC') that, subject to limits, provides protection against the deterioration of loss reserves relating to the Group's 2009 and prior underwriting years. This coverage is accounted for as retroactive reinsurance, which is reinsurance where the cedant is reimbursed for liabilities incurred as a result of past insurable events. Net costs of the ADC are recognised immediately as reinsurance premiums ceded in the Consolidated Income Statements. Any net gains that arise as a result of subsequent covered adverse development are deferred and amortised into income over the settlement period of the recoveries under the relevant contract.

Intangible assets and goodwill

The Group's intangible assets relate to syndicate capacity, distribution channels and US insurance licenses (as admitted and eligible surplus lines insurers). Intangible assets are valued at their fair value at the time of acquisition.

Purchased syndicate capacity and admitted licenses are considered to have an indefinite life and as such are subject to annual impairment testing. Surplus lines authorisations and distribution channels are considered to have a finite life and are amortised over their estimated useful lives of five years.

The Group evaluates the recoverability of its intangible assets whenever changes in circumstances indicate that an intangible asset may not be recoverable. If it is determined that an impairment exists, the excess of the unamortised balance over the fair value of the intangible asset is recognised as a charge to net income in the Consolidated Income Statements.

Goodwill represents the excess of purchase price over the net fair value of identifiable assets acquired and liabilities assumed in a business combination. Goodwill is deemed to have an indefinite life and is not amortised, but rather tested at least annually for impairment. Impairment losses are recognised in net income in the Consolidated Income Statements.

The impairment tests involve an initial assessment of qualitative factors. If this assessment indicates that further impairment testing is necessary, the fair values of reporting units and intangible assets are evaluated and compared to the relevant carrying values. The measurement of fair values is based on an evaluation of a number of factors, including ranges of future discounted earnings and recent market transactions. Certain key assumptions considered include forecasted trends in operating returns and cost of capital.

Other assets

Other assets include prepaid items, property and equipment, income tax recoverable and securities lending collateral.

Comprehensive income/(loss)

Comprehensive income/(loss) represents all changes in equity that result from recognised transactions and other economic events during the year. The Group's other comprehensive income/(loss) primarily comprises foreign currency translation adjustments.

Foreign currency

Foreign currency translation

The reporting currency of the Group is US dollars. The financial statements of each of the Group's entities are initially measured using the entity's functional currency, which is determined based on its operating environment and underlying cash flows. For entities with a functional currency other than US dollars, foreign currency assets and liabilities are translated into US dollars using period-end rates of exchange, while Income Statements are translated at average rates of exchange for the period. The resulting translation differences are recorded as a separate component of accumulated other comprehensive income/(loss) within stockholders' equity.

Foreign currency transactions

Monetary assets and liabilities denominated in currencies other than the functional currency are re-valued at period-end rates of exchange, with the resulting gains and losses included in income.

Income taxes

Income taxes have been provided for those operations that are subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Group's assets and liabilities. Such temporary differences are primarily due to the recognition of untaxed profits and intangible assets arising from the acquisition of Wellington Underwriting plc ('Wellington') in December 2006. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all or some portion of the benefits related to deferred tax assets will not be realised.

Stock compensation

The fair value of awards under stock-based compensation arrangements is calculated on the grant date based on the share price and the exchange rate in effect on that date and is recognised in the Consolidated Income Statements on a straight-line basis over the vesting period. The calculation is updated on a regular basis to reflect revised vesting expectations and actual experience.

Treasury stock

Treasury stock comprises common shares in the Company purchased by and held within the Group. These shares are recognised at cost in the Consolidated Balance Sheets and are shown as a deduction from stockholders' equity.

Non-controlling interest in preferred stock

Non-cumulative perpetual preferred stock issued by a consolidated subsidiary of the Group is shown within stockholders' equity in the Consolidated Balance Sheets as non-controlling interest in preferred stock. They are valued based on the proceeds received when issued, net of issuance costs. The preferred stock is described further in Note 12.

From 2012, the presentation and description of these securities in the Group's financial statements have been amended to distinguish more clearly between preferred stock issued by a subsidiary and common stock of the Company. This change in presentation has had no impact on net income or stockholders' equity. The terms of the preferred stock are unchanged.

Warrants

Warrant contracts are initially recorded in additional paid-in capital at cost, and continue to be classified as equity so long as they meet certain conditions. Subsequent changes in fair value are not recognised in the Consolidated Income Statements as long as the warrant contracts continue to be classified as equity.

Pensions

The Group operates defined contribution pension schemes for eligible employees, the costs of which are expensed as incurred. The Group also sponsors a defined benefit pension scheme which was closed to new members in 1993. Any surplus or deficit on the scheme is carried as an asset or liability on the balance sheet.

New accounting pronouncements

In October 2010 the Financial Accounting Standards Board ('FASB') issued new accounting guidance specifying how costs associated with acquiring or renewing insurance contracts should be identified and capitalised. This guidance is effective for periods beginning after 15 December 2011. Catlin has prospectively adopted this updated accounting guidance from 1 January 2012. The adoption of this guidance did not have a significant effect on the Group's financial position or results of operations.

In May 2011 the FASB issued new accounting guidance on fair value measurements. This guidance is intended to result in common fair value measurements and disclosures between US GAAP and International Financial Reporting Standards. Some of the amendments clarify the application of existing fair value measurement requirements. Other amendments change particular principles or requirements for measuring fair value and disclosing information about fair value measurements. The Group has prospectively adopted this guidance from 1 January 2012. The adoption of this guidance did not result in any impact on the Group's financial position or results of operations. The additional disclosures required are contained in Note 6 - Fair value measurement.

In June 2011 the FASB issued an accounting standard update requiring an entity to present total comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard has been retrospectively adopted by the Group from 1 January 2012. The Group has elected to present the components of net income and other comprehensive income in two separate, but consecutive statements. The results of this change are shown in the Consolidated Statements of Comprehensive Income. The adoption of this guidance affects presentation only and did not result in any impact on the Group's financial position or results of operations.

In July 2012 the FASB issued an accounting standard update on testing indefinite-life intangible assets for impairment, effective for years beginning after 15 September 2012. Early adoption is permitted. By providing the option to perform a 'qualitative' assessment to determine whether further impairment testing is necessary, the update aims to reduce the cost and complexity of performing the annual intangible asset impairment test. The Company has prospectively adopted this accounting standard update, effective for the year ended 31 December 2012. The adoption of the new accounting standard update did not have a significant impact on the Group's financial position or result of operations.

3 Segmental information

The Group determines its reportable segments by underwriting hubs, consistent with the manner in which results are reviewed by management.

The four reportable segments are:

· London/UK, which comprises direct insurance and reinsurance business originating in the United Kingdom;

· Bermuda, which primarily underwrites reinsurance business;

· US, which underwrites direct insurance and reinsurance business originating in the United States; and

· International, which comprises the Group's Asia-Pacific, Europe and Canada underwriting hubs, which provide a full complement of insurance and reinsurance services for their markets.

At 31 December 2012 there were four significant intra-Group reinsurance contracts in place: a 52.5 per cent Quota Share, which cedes Catlin Syndicate risk to Catlin Re Switzerland; a 75 per cent quota share contract, which cedes Catlin UK risk to Catlin Re Switzerland; a Whole Account Stop Loss contract, which cedes 7.5 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 82.5 per cent from the Catlin Syndicate to Catlin Re Switzerland; and a 75 per cent quota share contract, which cedes Catlin US risk to Catlin Re Switzerland. Further quota share contracts were in place that ceded risk from 2010 and prior underwriting years to Catlin Bermuda. The effects of each of these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

Net underwriting contribution by underwriting hub for the year ended 31 December 2012 is as follows:

US dollars in millions	London/ UK	Bermuda	US	International	Total
Gross premiums written	$2,525	$523	$1,045	$879	$4,972

Net premiums earned	1,850	415	733	606	3,604
Losses and loss expenses	(896)	(215)	(505)	(404)	(2,020)
Policy acquisition costs	(429)	(98)	(140)	(129)	(796)
Net underwriting contribution	$525	$102	$88	$73	$788

Net underwriting contribution by underwriting hub for the year ended 31 December 2011 is as follows:

US dollars in millions	London/ UK	Bermuda	US	International	Total
Gross premiums written	$2,342	$549	$852	$770	$4,513

Net premiums earned	1,891	471	636	614	3,612
Losses and loss expenses	(1,231)	(435)	(403)	(460)	(2,529)
Policy acquisition costs	(419)	(102)	(118)	(120)	(759)
Net underwriting contribution	$241	$(66)	$115	$34	$324

The components of net underwriting contribution shown above are reported on the face of the Consolidated Income Statements. No other items of revenue or expenses are managed on a segmental basis.

Assets are reviewed in total by management for the purpose of decision making. The Group does not allocate assets to the reporting segments.

4 Investments

Fixed maturities

The fair values of fixed maturities at 31 December 2012 and 2011 are as follows:

US dollars in millions	2012	2011
US government and agencies	$807	$1,702
Non-US governments	1,503	1,326
Corporate securities	1,727	1,529
Asset-backed securities	675	602
Mortgage-backed securities	892	860
Interest rate derivative contracts	(6)	8
Credit default derivative contracts	5	2
Total fixed maturities	$5,603	$6,029

$740 million (2011: $713 million) of the total mortgage-backed securities at 31 December 2012 is represented by investments in Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Bank and Federal Home Loan Mortgage Corporation bonds.

The composition of the fair values of fixed maturities by ratings assigned by rating agencies is as follows:

		2012		2011
US dollars in millions	Fair value	%	Fair value	%
US government and agencies	$807	14	$1,702	28
Non-US governments	1,503	27	1,326	22
AAA	1,132	20	908	16
AA	1,331	24	1,465	24
A	660	12	483	8
BBB and other	171	3	135	2
Interest rate derivative contracts	(6)	-	8	-
Credit default derivative contracts	5	-	2	-
Total fixed maturities	$5,603	100	$6,029	100

Fixed maturities at 31 December 2012, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Fair value US dollars in millions	2012	2011
Due in one year or less	$415	$540
Due after one through five years	2,699	3,158
Due after five years through ten years	829	771
Due after ten years	94	88
	4,037	4,557
Asset-backed securities	675	602
Mortgage-backed securities	892	860
Interest rate derivative contracts	(6)	8
Credit default derivative contracts	5	2
Total fixed maturities	$5,603	$6,029

The Group did not have an aggregate investment with a single counterparty, other than the US government, in excess of 10 per cent of total investments at 31 December 2012 and 2011.

Other invested assets

Other invested assets by category at 31 December 2012 and 2011 are as follows:

US dollars in millions	2012	2011
Hedge funds	$44	$109
Equity funds	34	23
Total investments in funds	78	132
Equity securities	251	38
Loan instruments	212	11
Equity market derivative contracts	3	-
Equity method investments	30	-
Total other invested assets	$574	$181

Hedge funds are a portfolio comprising nine individual hedge funds. The Group has issued redemption notices in respect of all of the hedge funds and received the majority of the proceeds. The balance will be paid on the completion of final fund audit or the disposal of remaining investments.

Equity funds are a portfolio comprising three individual private equity funds entered into in 2011. The equity funds have initial investment periods of up to five years.

Equity securities comprise $31 million of exchange traded funds, $170 million of quoted equity securities and $50 million of private equity.

Loan instruments comprise holdings in syndicated loans and other unquoted private debt.

There are unfunded commitments related to investments in funds of $39 million as at 31 December 2012 (2011: $58 million).

Equity method investments comprise investments over which the Group exercises significant influence. These investments are accounted for using the equity method. At 31 December 2012, the Group owned between 29.5 per cent and 50 per cent interests in these entities. The share of profit of equity method investments included within the Consolidated Income Statements was $1 million (2011: $nil million). In management's opinion the fair value of these investments is not less than their carrying value.

Net investment return

The components of net investment return for the years ended 31 December 2012 and 2011 are as follows:

US dollars in millions	2012	2011
Investment income	$138	$156
Net gains on investments	35	100
Total investment return	173	256
Investment expenses	(15)	(8)
Net investment return	$158	$248

The Group has elected to apply the fair value option to its fixed maturity securities and short-term investments. In 2012, net gains from fair value changes in these items were $48 million (2011: $102 million). Net losses in 2012 on other invested assets were $13 million (2011: $2 million).

Gains in 2012 on fixed maturities and short-term investments still held at 31 December 2012 were $34 million (2011: $38 million). Gains in 2012 on other invested assets still held at 31 December 2012 were $15 million (2011: $3 million).

Restricted assets

The Group is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. These funds on deposit are available to settle insurance and reinsurance liabilities. The Group also has investments in segregated portfolios primarily to provide collateral for Letters of Credit ('LOCs'), as described in Note 18. Finally, the Group also utilises trust funds set up for the benefit of certain ceding companies as an alternative to LOCs.

The total value of these restricted assets by category at 31 December 2012 and 2011 is as follows:

US dollars in millions	2012	2011
Fixed maturities	$3,038	$2,957
Short-term investments	25	35
Cash and cash equivalents	915	636
Total restricted assets	$3,978	$3,628

Securities lending

The Group participates in a securities lending programme under which certain of its fixed maturity investments are loaned to third parties through a lending agent. Collateral in the form of cash, government securities and letters of credit is required at a minimum rate of 102 per cent of the market value of the loaned securities and is monitored and maintained by the lending agent. The Group had $9 million (2011: $15 million) of securities on loan at 31 December 2012.

5 Derivative financial instruments

The Group is exposed to certain risks relating to its ongoing business operations. Risks managed by using derivative instruments include interest rate risk, foreign exchange risk, credit risk and equity risk. Derivatives are also used as a tool for efficient portfolio management.

Interest rate risk

The investment portfolio is predominantly invested in cash and fixed income securities and so is exposed to interest rate risk. Interest rate option and swap contracts are entered into in order to manage the market risk associated with holding cash and fixed income securities and also to manage any duration mismatch between assets and liabilities.

Gains and losses on interest rate derivative contracts are included in net investment return together with related gains on fixed maturities in the Consolidated Income Statements. Interest rate derivative contracts' fair value is included in fixed maturities on the Consolidated Balance Sheets.

Credit risk

Part of the investment portfolio is invested in bonds issued by corporate issuers and so is exposed to the default risk of the underlying issuers and also to mark to market fluctuations arising from the market's evaluation of this risk. Credit default option and swap contracts are entered into in order to manage the credit risk associated with holding these securities.

Gains and losses on credit default options are included in net investment return together with related gains on fixed maturities in the Consolidated Income Statements. Credit default derivative contracts' fair value is included in fixed maturities on the Consolidated Balance Sheets.

Equity risk

A portion of the investment portfolio is invested in equity securities and hedge funds. Equity market option and swap contracts are entered into to manage the market risk associated with holding these equity securities and for efficient portfolio management.

Gains and losses on equity market derivative contracts are included in net investment return together with related gains on other invested assets in the Consolidated Income Statements. Equity market derivative contracts' fair value is included in other invested assets on the Consolidated Balance Sheets

Foreign exchange risk

During the period, the Group held various foreign currency derivatives to manage currency risk. Gains and losses on foreign exchange contracts are included in net (losses)/gains on foreign currency in the Consolidated Income Statements.

Impact of derivatives

The fair values of derivatives at 31 December 2012 and 2011 are as follows:

		2012		2011
US dollars in millions	Assets	Liabilities	Assets	Liabilities
Interest rate derivative contracts	$11	$17	$18	$10
Credit default derivative contracts	6	1	2	-
Equity market derivative contracts	3	-	-	-
Total derivatives	$20	$18	$20	$10

The notional values of open derivatives at 31 December 2012 and 2011 are as follows:

	Notional value
US dollars in millions	2012	2011
Interest rate options	$2,300	$3,600
Interest rate swap contracts	785	500
Credit default swap option contracts	600	650
Credit default swap contracts	71	-
Equity market option contracts	3	-
Equity market swap contracts	55	-
Foreign exchange contracts	8	14

The net (losses)/gains on derivatives at 31 December 2012 and 2011 are as follows:

US dollars in millions	2012	2011
Interest rate derivative contracts	$(40)	$2
Credit default derivative contracts	(10)	(1)
Equity market derivative contracts	(31)	-
Commodity market derivative contracts	1	-
Foreign exchange derivative contracts	(3)	1
Net (losses)/gains on derivatives	$(83)	$2

The derivatives contracts held by the Group at 31 December 2012 contain no credit risk-related contingent features.

During 2012 derivatives were used in the investment portfolio to manage tail risks, modify duration positioning and for efficient portfolio and risk capital management. The interest rate derivative contracts were primarily used to shorten duration and provide protection against rising rate scenarios. The credit default derivative contracts provided protections for the credit risk in our core and tactical fixed income portfolios. Equity market derivative contracts were utilised both for tail risk protection and efficient portfolio management.

6 Fair value measurement

The FASB accounting guidance on fair value measurements and disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e. the 'exit price') in an orderly transaction between market participants at the measurement date. In determining fair value, management uses various valuation approaches, including market and income approaches. The FASB accounting guidance establishes a hierarchy for inputs used in measuring fair value that maximises the use of observable inputs and minimises the use of unobservable inputs by requiring that the most observable inputs be used when available. The three levels of the FASB accounting guideline on fair value measurements and disclosures hierarchy are described below.

Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Assets utilising Level 1 inputs comprise US government securities and quoted exchange-traded instruments.

Level 2 - Valuations based on quoted prices in markets that are not active or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

Assets and liabilities utilising Level 2 inputs include: US agency securities; non-US government obligations, corporate and municipal bonds, residential mortgage-backed securities ('RMBS'), commercial mortgage-backed securities ('CMBS') and asset-backed securities ('ABS') to the extent that they are not identified as Level 3 items; over-the-counter ('OTC') derivatives (e.g. foreign exchange contracts and interest rate contracts); fixed-term cash deposits classified as short-term investments; private debt with readily available prices; and investments in funds with few restrictions on redemptions or new investors.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own assessment of assumptions that market participants might use.

Assets utilising Level 3 inputs include: investments in funds with significant redemption restrictions; unquoted private equity and debt not qualifying as Level 2; collateralised debt obligations ('CDO'); and sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs reflect individual assumptions and judgments regarding ultimate delinquency and foreclosure rates and estimates regarding the likelihood and timing of events of defaults.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorised in Level 3. The Group uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels.

Assets and liabilities measured at fair value on a recurring basis

The table below shows the values at 31 December 2012 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

US dollars in millions	Balance as at 31 December 2012	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
US government and agencies	$807	$415	$392	$-
Non-US governments	1,503	-	1,503	-
Corporate securities	1,727	-	1,711	16
RMBS	804	-	763	41
CMBS	88	-	82	6
ABS	675	-	651	24
Interest rate derivative contracts	(6)	-	(6)	-
Credit default derivative contracts	5	-	5	-
Total fixed maturities	5,603	415	5,101	87
Short-term investments	123	-	123	-
Other invested assets	544	202	196	146
Total assets at fair value	$6,270	$617	$5,420	$233

The table below shows the values at 31 December 2011 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

US dollars in millions	Balance as at 31 December 2011	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
US government and agencies	$1,702	$1,218	$484	$-
Non-US governments	1,326	-	1,326	-
Corporate securities	1,529	-	1,529	-
RMBS	795	-	751	44
CMBS	65	-	62	3
ABS	602	-	602	-
Interest rate derivative contracts	8	-	8	-
Credit default derivative contracts	2	-	2	-
Total fixed maturities	6,029	1,218	4,764	47
Short-term investments	115	-	115	-
Other invested assets	181	24	37	120
Total assets at fair value	$6,325	$1,242	$4,916	$167

The changes in the year ended 31 December 2012 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

US dollars in millions	Total	RMBS	Corporate	CMBS	ABS	Other Invested assets
Balance, 1 January 2012	$167	$44	$-	$3	$-	$120
Total net gains included in income	24	7	-	1	3	13
Acquisitions	119	20	16	2	22	59
Disposals	(82)	(33)	-	(2)	(1)	(46)
Transfers into Level 3	5	3	-	2	-	-
Balance, 31 December 2012	$233	$41	$16	$6	$24	$146

Amount of gains relating to balances still held at year end	$14	$2	$-	$-	$3	$9

RMBS assets transferred into Level 3 were securities classified as sub-prime at 31 December 2012 but not at 31 December 2011. CMBS assets transferred into Level 3 were the result of a credit downgrade during the year.

The changes in the year ended 31 December 2011 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

US dollars in millions	Total	RMBS	CMBS	ABS	CDO	Other invested assets
Balance, 1 January 2011	$168	$2	$-	$3	$3	$160
Total net gains/(losses) included in income	2	(2)	-	-	5	(1)
Acquisitions	92	47	2	-	-	43
Disposals	(105)	(11)	-	(3)	(8)	(83)
Transfers into Level 3	9	8	1	-	-	-
Foreign exchange	1	-	-	-	-	1
Balance, 31 December 2011	$167	$44	$3	$-	$-	$120

Amount of losses relating to balances still held at year end	$(2)	$(1)	$-	$-	$-	$(1)

Assets transferred into Level 3 were securities classified as sub-prime at 31 December 2011 but not at 31 December 2010.

Fair value of financial instruments

The following methods and assumptions are used by the Group in estimating the fair value of its financial instruments:

Fixed maturities and short-term investments

Fair values of fixed maturities and short-term investments are based on the quoted market price of these securities provided by either independent pricing services, or, when such prices are not available, by reference to broker or underwriting bid indications.

The Group's Level 3 fixed maturities consist of RMBS, CMBS, ABS and Corporate securities, for which pricing vendors and non-binding broker quotes are the primary source of the valuations. The Group compares the price to independent valuations, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value. Although the Group does not have access to the specific unobservable inputs that may have been used in the fair value measurements of RMBS, CMBS and ABS, we would expect that the significant inputs considered are prepayment rates, probability of default, loss severity in the event of default, recovery rates, liquidity premium and reinvestment rates. Significant increases or decreases in any of those inputs in isolation could result in a significantly different fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

Other invested assets

The fair value of investments in funds is based on the net asset value provided by the funds' administrators. The fair values of holdings in equity and loan instruments are based on the market price of these securities provided by independent pricing services, or, when such prices are not available, by reference to broker or underwriting bid indications provided by administrators and recent transactions, if any.

The Group's Level 3 other invested assets consist of investments in funds with significant redemption restrictions and unquoted private equity and debt, for which manager NAV statements are the primary source of the valuations. Although the Group does not have access to the specific unobservable inputs that may have been used in the fair value measurements, we would expect the significant inputs for private equity and debt to be discounted cash flows and valuations of similar sized peers. Significant increases or decreases in any of those inputs in isolation could result in a significantly different fair value measurement.

Derivatives

The fair values of interest rate, foreign exchange, equity market and credit default derivative contracts are based on prices provided by independent pricing services.

Subordinated debt

Subordinated debt is carried at amortised cost. At 31 December 2012, the fair value of the subordinated debt was $80 million, which compared to a carrying value of $92 million. The fair value of the subordinated debt is estimated by comparing Catlin Bermuda's preferred stock and other peer group instruments to determine market required yields. As such, fair value of subordinated debt is classified as Level 2.

Other assets and liabilities

The fair values of cash and cash equivalents, premiums and other receivables, and accounts payable approximate their carrying value due to the immediate or short term maturity of these financial instruments.

7 Reserves for losses and loss expenses

The Group establishes reserves for losses and loss expenses, which are estimates of future payments of reported and unreported losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves is complex and imprecise, requiring the use of informed estimates and judgments. The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in earnings in the period in which the estimates are changed. Management believes that they have made a reasonable estimate of the level of reserves at 31 December 2012 and 2011.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2012 and 2011 is as follows:

US dollars in millions	2012	2011
Gross unpaid losses and loss expenses, beginning of year	$6,467	$5,549
Reinsurance recoverable on unpaid losses and loss expenses	(1,188)	(1,039)
Net unpaid losses and loss expenses, beginning of year	5,279	4,510
Net incurred losses and loss expenses for claims related to:
Current year	2,159	2,632
Prior years	(139)	(103)
Total net incurred losses and loss expenses	2,020	2,529
Net paid losses and loss expenses for claims related to:
Current year	(550)	(724)
Prior years	(1,519)	(1,000)
Total net paid losses and loss expenses	(2,069)	(1,724)
Foreign exchange and other	56	(36)
Net unpaid losses and loss expenses, end of year	5,286	5,279
Reinsurance recoverable on unpaid losses and loss expenses	1,400	1,188
Gross unpaid losses and loss expenses, end of year	$6,686	$6,467

The Group has reviewed its estimates of loss reserves and loss expenses for prior period insured events. Prior-year releases for the year ended 31 December 2012 include $20 million of out-of-period adjustments, principally reflecting income on certain reinsurance commutations executed between 2009 and 2011. The impacts of these items were not material to any of the prior periods. Other changes in estimates of insured events in prior years due to movements in expected ultimate loss costs and in uncertainty surrounding the quantification of the net cost claim events decreased the loss reserves by $139 million (2011: $103 million)

8 Reinsurance

			2012			2011
US dollars in millions	Premiums written	Premiums earned	Losses incurred	Premiums written	Premiums earned	Losses incurred
Direct	$3,112	$2,897	$1,523	$2,834	$2,747	$1,545
Assumed	1,860	1,661	1,052	1,679	1,528	1,361
Ceded	(1,138)	(954)	(555)	(678)	(663)	(377)
Net premiums	$3,834	$3,604	$2,020	$3,835	$3,612	$2,529

The Group's reinsurance recoverable on unpaid and paid losses as at 31 December 2012 and 2011 is as follows:

US dollars in millions	2012	2011
Gross reinsurance recoverable	$1,534	$1,252
Provision for uncollectible balances	(31)	(35)
Net reinsurance recoverable	$1,503	$1,217

The Group evaluates the financial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All current reinsurers have a financial strength rating of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral. However, certain reinsurers from prior years have experienced reduced ratings which have led to the need for the provision.

At 31 December 2012 there were five counterparties which accounted for 5 per cent or more of the total reinsurance recoverable balance.

	% of reinsurance recoverable	Security
Munich Re	29%	A+ (A.M. Best)
DE Shaw Re	10%	Collateralised
Aeolus Re	7%	Collateralised
Swiss Re	7%	A+ (A.M. Best)
Hannover Re	5%	A+ (A.M. Best)

9 Subordinated debt

The Group's outstanding subordinated debt as at 31 December 2012 and 2011 consisted of the following:

US dollars in millions	2012	2011
Variable rate, face amount €7, due 15 March 2035	$9	$9
Variable rate, face amount $27, due 15 March 2036	27	27
Variable rate, face amount $31, due 15 September 2036	31	31
Variable rate, face amount $10, due 15 September 2036	10	10
Variable rate, face amount €11, due 15 September 2036	15	14
Total subordinated debt	$92	$91

On 12 May 2006 Catlin Underwriting (formerly known as Wellington Underwriting plc) issued $27 million and €7 million 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 317 basis points for the Dollar note and 295 basis points for the Euro note. Interest is payable quarterly in arrears. The notes were redeemable at the discretion of the issuer beginning on 15 March 2011 with respect to the Dollar notes and 22 May 2011 with respect to the Euro notes.

On 20 July 2006 Catlin Underwriting issued $31 million, $10 million and €11 million 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 million notes and 300 basis points for the other two notes. Interest is payable quarterly in arrears. The notes were each redeemable at the discretion of the issuer on 15 September 2011.

10 Intangible assets and goodwill

The Group's intangible assets relate to the purchase of syndicate capacity, distribution channels and US surplus lines authorisations. Goodwill represents the excess of purchase price over the net fair value of identifiable assets acquired and liabilities assumed in a business combination.

Net intangible assets and goodwill as at 31 December 2012 and 2011 consist of the following:

US dollars in millions	Goodwill	Indefinite life intangibles	Finite life intangibles	Total
Net value at 1 January 2011	$77	$637	$2	$716
Movements during 2011:
Acquisitions	-	3	-	3
Amortisation charge	-	-	(2)	(2)
Total movements during 2011	-	3	(2)	1
Net value at 31 December 2011	$77	$640	$-	$717
Movements during 2012:
Foreign exchange revaluation	3	-	-	3
Acquisitions	-	-	-	-
Amortisation charge	-	-	-	-
Total movements during 2012	3	-	-	3
Net value at 31 December 2012	$80	$640	$-	$720

The acquisition of indefinite life intangibles in 2011 relates to the purchase of admitted licenses in the United States.

The syndicate capacity comprises underwriting capacity that the Group purchased through business combination, syndicate cessation and direct purchases.

Indefinite life intangible assets and goodwill are tested annually for impairment as at 30 September. For the purposes of impairment testing, $14 million is attributable to the US segment, the remainder to the London/UK segment. In 2012 and 2011, management determined that no impairment of intangibles or goodwill was required.

Distribution channels and surplus lines authorisations are considered to have a finite life and are amortised over their estimated useful lives of five years. As at 31 December 2011 the gross carrying amount of finite life intangibles had been fully amortised. There will be no amortisation of these intangible assets in future years.

11 Taxation

Bermuda

Under current Bermuda law neither the Company nor its Bermuda subsidiaries are required to pay any taxes in Bermuda on their income or capital gains. Both the Company and its Bermuda subsidiaries have received undertakings from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, they will be exempt from taxation in Bermuda until March 2035.

United Kingdom

The Group also operates in the UK through its UK subsidiaries and the income of the UK companies is subject to UK corporation taxes.

The Finance Bill 2012 introduced a reduction to the UK corporation tax rate from 25 per cent to 24 per cent from 1 April 2012 and to 23 per cent from 1 April 2013. The impact of these rate reductions has reduced the carrying value of the Group's deferred tax liabilities by approximately $19 million.

Income from the Group's operations at Lloyd's is also subject to US income taxes. Under a Closing Agreement between Lloyd's and the Internal Revenue Service (IRS), Lloyd's Members pay US income tax on US connected income written by Lloyd's syndicates. US income tax due on this US connected income is calculated by Lloyd's and remitted directly to the IRS and is charged by Lloyd's to Members in proportion to their participation on the relevant syndicates. The Group's Corporate Members are all subject to this arrangement but, as UK tax residents, will receive UK corporation tax credits for any US income tax incurred up to the value of the equivalent UK corporation income tax charge on the US income.

United States

The Group operates in the United States through its subsidiaries, and their income is subject to both US state and federal income taxes.

Switzerland

The Group also operates in Switzerland through its subsidiaries, and their income is subject to Swiss federal and cantonal taxes.

Other international income taxes

The Group has a network of international operations, and they are also subject to income taxes imposed by the jurisdictions in which they operate, but they do not constitute a material component of the Group's tax charge.

The Group is not subject to taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Group to change the way it operates or become subject to taxation.

The income tax expense for the year ended 31 December 2012 and 2011 is as follows:

US dollars in millions	2012	2011
Current tax (benefit)/expense	$(1)	$6
Deferred tax expense	8	2
Change in uncertain tax positions	2	-
Rate change on deferred tax	(19)	(19)
Benefit for income taxes	$(10)	$(11)

The effective tax rate for the Group is negative 2.8 per cent (2011: negative 15.6 per cent). The rate change benefit of $19 million is a result of a reduction in the UK corporation tax rate from 25 per cent to 23 per cent on the Group's net UK deferred tax liabilities. This deferred tax benefit reduces the Group's effective tax rate from 2.9 per cent to negative 2.8 per cent.

A reconciliation of the difference between the expense for income taxes and the expected tax expense at the weighted average tax rate for the years ended 31 December 2012 and 2011 is provided below. The weighted average expected tax expense has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

US dollars in millions	2012	2011
Expected tax expense at weighted average rate	$11	$10
Permanent differences:
Disallowed expenses and losses not recognised	5	10
Prior year adjustments including changes in uncertain tax positions	(7)	(12)
Rate change	(19)	(19)
Benefit for income taxes	$(10)	$(11)

The components of the Group's net deferred tax liability as at 31 December 2012 and 2011 are as follows:

US dollars in millions	2012	2011
Deferred tax assets:
Net operating loss carry forwards	$160	$267
Foreign tax credits	48	42
Capital allowances	16	13
Other timing differences	33	25
Valuation allowance	(31)	(25)
Total deferred tax assets	$226	$322
Deferred tax liabilities:
Untaxed profits	(308)	(416)
Intangible assets arising on business combination	(85)	(92)
Syndicate capacity	(18)	(16)
Total deferred tax liabilities	$(411)	$(524)
Net deferred tax liability	$(185)	$(202)

As at 31 December 2012 the Group has operating tax losses carried forward of $691 million (2011: $1,069 million) which are available to offset future taxable income. The tax losses primarily arise in UK subsidiaries and relate to accelerated tax deductions for member-level reinsurance premiums. These are taxed on a declarations basis and are therefore only timing items. There are no time restrictions on the use of these losses and they are expected to be fully utilised.

As at 31 December 2012 there are potential deferred tax assets of $27 million (2011: $25 million) in the US companies and $4 million in the Swiss companies relating to future tax deductions, but a 100 per cent valuation allowance has been recognised in respect of these.

Uncertain tax positions

As at 31 December 2012 the liability amount of uncertain tax benefits was $15 million (2011: $13 million). All unrecognised tax benefits would affect the effective tax rate if recognised.

A reconciliation of the beginning and ending amount of unrecognised tax benefits arising from uncertain tax positions is as follows:

US dollars in millions	2012	2011
Unrecognised tax benefits balance at 1 January	$13	$13
Gross increase for tax positions of prior years	2	-
Unrecognised tax benefits balance at 31 December	$15	$13

The Group does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts. The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements. The Group did not pay or accrue any interest or penalties in 2012 or 2011 relating to uncertain tax positions.

The following table lists the open tax years that are still subject to examinations by local tax authorities in major tax jurisdictions:

Major tax jurisdiction	Years
United Kingdom	2008-2012
United States	2009-2012
Switzerland	2010-2012

12 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2012 and 2011:

	2012	2011
Common stock, par value $0.01
Authorised	500,000,000	500,000,000

Issued	361,824,004	360,990,321
Stock held by Employee Benefit Trust	(10,777,727)	(16,031,213)
Outstanding	351,046,277	344,959,108

Preferred stock issued by consolidated subsidiary, par value $0.01
Authorised, issued and outstanding	600,000	600,000

The following table outlines the changes in common stock issued during 2012 and 2011:

	2012	2011
Balance, 1 January	360,990,321	359,118,666
Exercise of stock options and warrants	833,683	1,871,655
Balance, 31 December	361,824,004	360,990,321

Treasury stock

Through an Employee Benefit Trust ('EBT'), the Group holds shares that will be used to satisfy Performance Share Plan ('PSP') and/or other employee share plan awards if and when they vest and become exercisable. The EBT has not purchased shares during 2012. The cost of shares held by the EBT of $73 million is shown as a deduction to the stockholders' equity.

Warrants

In 2002 the Company issued 20,064,516 warrants to purchase common stock. These were exercisable in whole or in part, at any time, until 4 July 2012 at a price per share of $4.37. During 2009 warrants increased by 874,829 in relation to the Rights Issue pursuant to anti-dilution provisions. During 2012, 1,416,944 warrants to purchase common stock were exercised and settled net for 445,073 shares of common stock. At 31 December 2012 there are no warrants outstanding as all warrants have lapsed.

Preferred stock

Catlin Insurance Company Limited ('Catlin Bermuda') is a consolidated subsidiary whose common stock is wholly owned by the Company. In 2007, Catlin Bermuda issued 600,000 non-cumulative perpetual preferred shares, par value of $0.01 per unit, with liquidation preference of $1,000 per unit, plus declared and unpaid dividends. Dividends at a rate of 7.249 per cent on the liquidation preference are payable semi-annually on 19 January and 19 July in arrears as and when declared by the Board of Directors, commencing on 19 July 2007 up to but not including 19 January 2017. Thereafter, if the stock has not yet been redeemed, dividends will be payable quarterly at a rate equal to 2.975 per cent plus the three-month LIBOR rate of the liquidation preference. Catlin Bermuda received proceeds of approximately $590 million, net of issuance costs. The preferred shares do not have a maturity date and are not convertible into or exchangeable into any of Catlin Bermuda's or the Group's other securities.

Dividends

Dividends on common stock

On 16 March 2012 the Group paid a final dividend on the common stock relating to 2011 financial year of 19.0 pence per share (30.2 cents per share) to stockholders of record at the close of business on 17 February 2012. The total dividend paid for the 2011 financial year was 28.0 pence per share (44.9 cents per share).

On 21 September 2012, the Group paid an interim dividend relating to the 2012 financial year of 9.5 pence per share (14.7 cents per share) to stockholders of record on 24 August 2012.

Non-controlling preferred stock dividend

On both 19 January and 19 July, Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

13 Employee stock compensation schemes

The Group has five employee schemes in place, of which the most significant is the Performance Share Plan ('PSP'), adopted in 2004. The Long Term Incentive Plan ('LTIP') was adopted in 2002 and the last awards were made in 2004. In addition, the Group also has three Employee Share Plans in place. The expense related to the Employee Share Plans is considered to be insignificant. These financial statements include the total cost of stock compensation for all plans, calculated using the fair value method of accounting for stock-based employee compensation.

The total amount expensed to income in respect of all plans in the year ended 31 December 2012 was $29 million (2011: $10 million), included in administrative and other expenses. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions.

Performance Share Plan

In February 2012 a total of 8,233,860 options with $nil exercise price and 2,984,523 non-vested shares (total of 11,218,383 securities) were awarded to Group employees under the PSP. In August 2012, a further 81,091 options with $nil exercise price and 58,563 non-vested shares (total of 139,654 securities) were awarded, resulting in a total of 11,358,037 securities granted to Group employees under the PSP in 2012. Up to half of the securities will vest in 2015 and up to half will vest in 2016, subject to certain performance conditions.

These securities have been treated as non-vested shares and as such have been measured at their fair value on the grant date as if they were fully vested and issued and assuming an annual attrition rate amongst participating employees of 2 per cent for grants made in 2012, 3 per cent for grants made in 2011, 3 per cent for grants made in 2010 and 5 per cent for grants made in 2009. This initial valuation is revised at each balance sheet date to take account of actual achievement of the performance condition that governs the level of vesting and any changes that may be required to the attrition assumption. The difference is charged or credited to the Consolidated Income Statements, with a corresponding adjustment to equity. The total number of shares in respect of which PSP securities were outstanding at 31 December 2012 was 33,187,769 (2011: 27,776,130), and the total amount of expense relating to PSP for the year ended 31 December 2012 was $29 million (2011: $10 million).

The table below shows the PSP securities as at 31 December 2012:

	Outstanding	Non-vested	Vested	Weighted average fair value
Beginning of year	27,776,130	27,408,549	367,581	$6.18
Granted during year	11,358,037	11,358,037	-	$6.62
Vested during year	(2,350,474)	(5,543,627)	3,193,153	$7.09
Forfeited during year	(884,172)	(884,172)	-	$7.01
Exercised during year	(2,711,752)	-	(2,711,752)	$6.74
End of year	33,187,769	32,338,787	848,982	$8.16
Exercisable, end of year	848,982	-	848,982	$8.16

The total fair value of shares vested during the year was $23 million (2011: $6 million).

The weighted average remaining contractual life of the options is eight years. The maximum contractual term of the equity share options outstanding is nine years.

The total compensation to be expensed in future periods relating to unvested awards outstanding at the year end is $50 million. The weighted average period of recognition of these shares is 2.5 years.

Long Term Incentive Plan

Options over a total of 16,791,592 ordinary common shares were granted to eligible employees in 2004 and prior years. The LTIP options were fully exercisable and expensed by 31 December 2007. There was no compensation expense in relation to the LTIP for the years ended 31 December 2012 and 2011. All options expired on 4 July 2012; therefore there are no options outstanding at 31 December 2012.

14 Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to common stockholders by the weighted average number of common shares issued and outstanding during the year.

Diluted earnings per share is calculated by dividing the earnings attributable to common stockholders by the weighted average number of common shares issued and outstanding, adjusted to assume conversion of all dilutive potential common shares. The Company has the following potentially dilutive instruments outstanding during the years presented:

(i) PSP;

(ii) LTIP;

(iii) Warrants; and

(iv) Employee Share Plans.

Income to common stockholders is arrived at after deducting non-controlling preferred stock dividends of $44 million (2011: $44 million).

Reconciliations of the number of shares used in the calculations are set out below.

	2012	2011
Weighted average number of shares	349,064,734	344,295,329
Dilution effect of warrants	708,472	1,912,689
Dilution effect of stock options and non-vested shares	16,844,854	11,547,550
Weighted average number of shares on a diluted basis	366,618,060	357,755,568

Earnings per common share
Basic	$0.88	$0.11
Diluted	$0.83	$0.11

In 2012 and 2011 securities awarded under the PSP were included in the computation of diluted earnings per share to the extent that the performance conditions necessary for these securities to vest were met as at 31 December 2012 and 2011.

15 Other comprehensive income/(loss)

The following table details the individual components of other comprehensive income/(loss) for 2012 and 2011:

US dollars in millions		Amount before tax		Tax benefit	Amount after tax
2012
Cumulative translation adjustments		$24		$6	$30
Defined benefit pension plan		2		-	2
Other comprehensive income		$26		$6	$32
2011
Cumulative translation adjustments	$(46)		$4		$(42)
Defined benefit pension plan	-		-		-
Other comprehensive loss	$(46)		$4		$(42)

The following table details the components of accumulated other comprehensive loss as at 31 December:

US dollars in millions	2012	2011
Cumulative translation adjustments	$(197)	$(227)
Funded status of defined benefit pension plan adjustment	3	1
Accumulated other comprehensive loss	$(194)	$(226)

16 Pension commitments

The Group operates various pension schemes for employees in the different countries of operation.

In the UK the Group operates defined contribution schemes for certain directors and employees, which are administered by third-party insurance companies. The pension cost for the UK scheme was $13 million for the year ended 31 December 2012 (2011: $11 million).

In Bermuda the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2012 (2011: $1 million).

In the US the Group has adopted a 401(k) Profit Sharing Plan qualified under the Internal Revenue Code and a Non-Qualified Deferred Compensation Plan under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the US scheme was $3 million for the year ended 31 December 2012 (2011: $5 million).

In Switzerland the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Switzerland scheme was $1 million for the year ended 31 December 2012 (2011: $1 million).

In connection with the acquisition of Wellington in December 2006, the Group assumed liabilities associated with a defined benefit pension scheme which Wellington sponsored. The scheme has been closed to new members since 1993. The current membership consists only of pensioners and deferred members. Projected benefit obligations at 31 December 2012 were $30 million (2011: $26 million) and fair value of plan assets was $33 million (2011: $28 million). Plan assets are substantially all invested in corporate bonds, valued using Level 2 inputs in the fair value hierarchy described in Note 6. The pension costs for the defined benefit scheme were insignificant for the years ended 31 December 2012 and 2011.

Pension costs for pension schemes in other countries of operation are considered individually insignificant but in aggregate amount to $4 million (2011: $4 million).

17 Statutory financial data

The statutory capital and surplus of each of the Group's principal operating subsidiaries, excluding Catlin Syndicate, is in excess of regulatory requirements which are as follows:

US dollars in millions	2012	2011
United Kingdom	$167	$163
United States	102	69
Switzerland	1,078	331
Bermuda	995	424

The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,158 million (2011: $1,340 million).

The Group's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is limited by applicable laws and statutory requirements of the jurisdictions in which the Group operates.

The Group is also subject to restrictions on some of its assets to support its insurance and reinsurance operations, as described in Note 4.

18 Commitments and contingencies

Legal proceedings

The Group is party to a number of legal proceedings arising in the ordinary course of the Group's business which have not been finally adjudicated. While the results of the litigation cannot be predicted with certainty, management believes that the outcome of these matters will not have a material impact on the results of operations or financial condition of the Group.

Concentrations of credit risk

Areas where significant concentration of risk may exist include investments, reinsurance recoverable, and cash and cash equivalent balances.

The cash balances and investment portfolio are managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single institution issue and issuers. Similar principles are followed for the purchase of reinsurance. The Group believes that there are no significant concentrations of credit risk associated with its investments or its reinsurers. Note 8 describes concentrations of more than 5 per cent of the Group's total reinsurance recoverable asset.

Letters of credit

The Group arranges letter of credit facilities to support its reinsurance business and for general corporate purposes.

As at 31 December 2012, the Group has access to the following letter of credit facilities:

· A three-year $650 million unsecured multi-bank facility available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2012, $266 million of letters of credit were issued under this facility. The facility has a termination date of 31 December 2013.

· A bilateral facility available for utilisation by Catlin Bermuda, collateralised by pledged financial assets. As at 31 December 2012, $147 million of letters of credit were issued under this facility.

· A bilateral facility available for utilisation by Catlin Re Switzerland, collateralised by pledged financial assets. As at 31 December 2012, $20 million of letters of credit were issued under this facility.

· Two facilities available for utilisation by Catlin Bermuda and guaranteed by the Company for Funds at Lloyd's purposes. As at 31 December 2012, $200 million of letters of credit were issued under these facilities. The facilities have expiry dates of 31 December 2015 and 31 December 2016.

· An Australian $50 million ($52 million) unsecured bilateral facility, available for utilisation by appointed members of the Group and guaranteed by the Company, for the purpose of providing collateral to Australian beneficiaries. As at 31 December 2012, Australian $43 million ($45 million) of letters of credit were issued under this facility. The facility has an expiry date of 30 June 2013.

· A facility managed by Lloyd's, acting for the Syndicates. As at 31 December 2012, $8 million of letters of credit were issued under this facility.

In addition, Catlin US has letters of credit amounting to $6 million issued for the benefit of state regulators and other parties.

Future lease commitments

The Group leases office space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2012 are as follows:

US dollars in millions
2013	$21
2014	22
2015	19
2016	14
2017 and thereafter	79
Total	$155

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $25 million (2011: $15 million).

19 Related parties

The Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2012 and 2011 was insignificant to the Group Financial Statements.

All transactions with related parties were entered into on normal commercial terms.

20 Subsequent events

Proposed dividend

On 7 February 2013 the Board approved a proposed final dividend of 20.0 pence per share (31.3 cents per share), payable on 22 March 2013 to stockholders of record at the close of business on 22 February 2013. The final dividend is payable in sterling.

Non-controlling preferred stock dividend

The Board of Catlin Bermuda approved a dividend of $22 million to the shareholders of the non-cumulative perpetual preferred stock. This dividend was paid on 19 January 2013.

Management has evaluated subsequent events until 7 February 2013, the date of issuance of the financial statements.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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