Final Results
CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2008
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 2008.
2008 Overview
-
2 per cent increase in gross premiums written to $3.4 billion; 32 per cent increase from Catlin US, Catlin Bermuda and international offices
-
Combined ratio of 95 per cent on US GAAP basis; reflects increase in catastrophe and large single-risk losses (2007: 84 per cent)
-
Average weighted premium rate decrease across risk portfolio of 4 per cent
-
-1.5 per cent net investment return, including all unrealised gains and losses; reflects economic volatility (2007: 4.5 per cent)
-
Loss before tax of US$13 million (2007: US$543 million profit)
-
Net loss to common stockholders of US$46 million (2007: US$462 million profit)(1)
-
-2.2 per cent return on average equity (2007: 20.8 per cent)(2)
-
Proposed 6 per cent increase in annual dividend to 26.6 pence (43.4 US cents)
-
7 per cent increase in sterling book value per share to £5.18; 21 per cent decrease in US dollar book value per share to US$7.57
-
10 per cent increase in sterling net tangible book value per share to £3.63; 19 per cent decrease in US dollar net tangible book value per share to US$5.30
2009 Outlook
-
Rates for property reinsurance and energy classes rose approximately 10 percent during January renewals
-
Rates for other classes of business expected to continue to harden during the year
-
Market turn will be widespread and sustainable
-
Catlin is well-placed to take advantage of 2009 opportunities
-
Fully underwritten Rights Issue, announced today, to raise approximately £200 million (US$288 million), net of expenses to allow Group to take full advantage of improving market conditions.
(1) Net (loss)/income to common stockholders for the period ended 31 December 2008 is stated after payment of US$43.5 million preferred share dividend (2007: $21.8 million)
(2) Returns on average equity and net tangible assets exclude preferred shares
|
US$000 |
2008 |
2007 |
% change |
|
Gross premiums written |
3,437,004 |
3,360,626 |
2% |
|
Net premiums written |
2,611,443 |
2,573,518 |
1% |
|
Net premiums earned |
2,596,041 |
2,489,534 |
4% |
|
Net underwriting contribution(1) |
453,966 |
803,892 |
(44%) |
|
Net (loss)/income before income taxes |
(12,551) |
543,368 |
- |
|
Net (loss)/income to common stockholders |
(46,389) |
461,718 |
- |
|
Earnings per share (US dollars) |
(0.19) |
1.84 |
- |
|
Proposed annual dividend per share (pence) |
26.6 |
25.1 |
6% |
|
Proposed annual dividend per share (US cents) |
43.4 |
50.2 |
(14%) |
|
Loss ratio |
62.9% |
46.4% |
|
|
Expense ratio |
32.1% |
37.7% |
|
|
Combined ratio |
95.0% |
84.1% |
|
|
Total net investment return |
(1.5%) |
4.5% |
|
|
Return on average equity(3) |
(2.2%) |
20.8% |
|
|
Return on average net tangible assets(3) |
(3.1%) |
32.9% |
|
|
|
31 Dec 2008 |
31 Dec 2007(2) |
% change |
|
Total assets |
$9,659,651 |
$9,600,845 |
1% |
|
Investments and cash |
$5,933,413 |
$6,001,144 |
(1%) |
|
Stockholders' equity |
$2,469,235 |
$3,017,004 |
(18%) |
|
Unearned premiums |
$1,536,203 |
$1,506,899 |
2% |
|
Book value per share (sterling)(3) |
£5.18 |
£4.82 |
7% |
|
Book value per share (US dollars)(3) |
$7.57 |
$9.59 |
(21%) |
|
Net tangible book value per share (sterling)(3) |
£3.63 |
£3.30 |
10% |
|
Net tangible book value per share (US dollars)(3) |
$5.30 |
$6.57 |
(19%) |
(1) Net underwriting contribution is defined as net premiums earned less losses and loss expenses and policy acquisition costs
(2) Certain prior year amounts have been restated to conform with current year presentation
(3) Returns on average equity and net tangible assets as well as book value and net tangible book value per share exclude preferred shares. Per-share amounts exclude treasury shares
Sir Graham Hearne, Chairman of Catlin Group Limited, said:
'The Catlin Group's performance during 2008 was significantly affected by the volatility in global investment markets as well as the increase in catastrophe and single-risk losses. However, there are clear signs that the property/casualty insurance and reinsurance market is hardening, and I believe Catlin is positioned to take advantage of this favourable market environment and to prosper during the years ahead.
'Catlin has today announced a fully underwritten Rights Issue to raise approximately £200 million (US$288 million), net of expenses. Catlin will be in a better position following the Rights Issue to take full advantage of the improving market conditions.'
Stephen Catlin, Chief Executive of Catlin Group Limited, said:
'These are uncertain economic times, but we are convinced that significant underwriting opportunities will emerge in 2009 and beyond. We anticipate that rate increases will become widespread and that the improvement in underwriting conditions will be sustainable.
'Catlin is well-prepared to prosper in this new market environment because we have consistently endeavoured to build a business that can adapt quickly to future trends. Our structure - which includes underwriting platforms in London, Bermuda and the United States combined with a global network of international offices - provides the Group with a well-diversified risk portfolio and will allow us to take advantage of opportunities wherever they may arise.'
- ends -
For more information contact:
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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 |
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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 writing more than 30 classes of business worldwide through four underwriting platforms and an international network of offices. Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). More information about Catlin can be found at www.catlin.com.
2. Catlin's 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.
3. Catlin management will make a presentation to investment analysts at 9.30am GMT today at its 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.
4. Rate of exchange at 31 December 2008 - balance sheet: £1 = US$1.46 (2007: £1 = US$1.99); income statement: £1 = US$1.85 (2007: £1 = US$2.00).
5. Earnings per share are based on weighted average shares in issue of 250 million during 2008. Book value per share is based on 248 million shares in issue at 31 December 2008. Earnings per share and book value per share exclude Treasury Shares held in trust.
6. Detailed information regarding Catlin's operations and financial results for the period ended 31 December 2008 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment information.
7. Catlin Group Limited is the title sponsor of the Catlin Arctic Survey, a major scientific expedition to measure the thickness and density of the permanent ice surrounding the North Pole. The project's aim is to determine, with a much greater degree of accuracy, when this ice could disappear as a result of global warming. The Survey, during which three Arctic explorers will trek on foot 1,300 kilometres to the North Pole, will begin in late February 2009. More information is available at www.catlinarcticsurvey.com.
8. This announcement is not an offer or solicitation to purchase or subscribe for securities in the United States. The securities mentioned herein have not and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an exemption from registration thereunder. There will be no public offer of such securities in the United States.
Chairman's Statement
The Catlin Group's performance during 2008 was significantly affected by the volatility in global investment markets as well as catastrophe and other single-event losses after two relatively benign years. Nevertheless, I believe that Catlin's underlying operating performance was good in the light of the difficult environment, and I am optimistic that the Group's results will improve during 2009.
There are clear signs that the property/casualty insurance and reinsurance market is hardening. Already, rates for property catastrophe reinsurance, Catlin's largest class of business, as well as other selected classes are increasing. We believe that rate increases for most other business classes will follow.
Catlin is in an excellent position to take advantage of improving market conditions. Over the past several years, the Group has significantly strengthened its infrastructure and expanded distribution capabilities, including the establishment of Catlin US and the ongoing development of our international offices. The successful integration of Wellington Underwriting plc has significantly increased the Group's size and stature. Catlin now holds a leadership position in the marketplace, particularly at Lloyd's of London where Catlin owns and manages the largest syndicate.
We have also added strategically to our team of underwriting and support professionals. During the past year Catlin's underwriting team was recognised in a major survey of brokers as providing superior levels of client service. Our employees, led by Stephen Catlin and his management team, are clearly focused on Catlin's commitment to disciplined underwriting. I express my thanks to Stephen and all Catlin employees for their hard work during what was a challenging year.
Rights Issue
Catlin has today announced a fully underwritten Rights Issue to raise approximately £200 million (US$288 million), net of expenses. Whilst the Group's existing capitalisation is sufficient to carry out current business plans, Catlin will be in a better position following the Rights Issue to take full advantage of the improving market conditions.
The Rights Issue will result in the issue of new Common Shares, representing 40 per cent of Catlin's existing issued share capital. The Rights Issue is conditional upon, amongst other things, shareholder approval at a Special General Meeting to be held on 9 March 2009.
Dividend
The Board of Directors proposes a final dividend of 18.0 pence (26.6 US cents) per share, payable on 15 May 2009 to shareholders of record at the close of business on 20 February 2009. Including the interim dividend of 8.6 pence (16.8 US cents) per share paid on 7 November 2008, the proposed total 2008 dividend of 26.6 pence (43.4 US cents) represents a 6 per cent increase in pence over the 2007 dividend.
The increase in the dividend demonstrates the Board's confidence in the Group's prospects and reaffirms our commitment to providing an attractive return to shareholders.
Board of Directors
Nicholas Lyons was appointed to the Board of Directors during 2008, succeeding Alton Irby who retired from the Board to concentrate on other commitments. Nick Lyons has a detailed knowledge of international financial markets and has already made a valuable contribution to the Group.
I would like to express my thanks to all of the Directors who served during 2008 for their hard work during what can best be described as a demanding year.
Outlook
The market environment is much changed from a year ago, and good opportunities exist for Catlin during 2009 and beyond. I believe the Group is well-prepared to take advantage of this favourable market environment and to prosper during the years ahead.
|
Sir Graham Hearne |
|
Chairman |
|
12 February 2009 |
Chief Executive's Review
The events of the past year combined to create what could best be described as a 'perfect storm' for insurers and reinsurers worldwide, including Catlin.
What began as the 'subprime crisis' accelerated into the 'credit crunch' and then developed into a full-blown global economic recession, the likes of which have not been seen for decades. Whilst the recession impacts insurers and reinsurers in many ways, the major ramifications for our market are threefold:
-
The volatility in global fixed income and equity investment markets, particularly in the second half of the year, significantly affected companies' investment returns;
-
Some leading insurers and reinsurers were forced to make substantial write-downs in the value of their assets, raising questions over their market positions; and
-
Catastrophe and large-single risk losses increased markedly compared with the previous two years of relatively benign loss activity. The insured loss caused by Hurricane Ike - whose damage extended from energy installations in the Gulf of Mexico and cities on the Texas coast all the way to homeowners in Ohio - is now estimated at a minimum of US$20 billion, making it the third most costly hurricane on record.
These factors had a significant adverse impact on Catlin's financial results during 2008, but they also are creating substantial opportunities for the Group in 2009 and beyond.
2009 - a changing market environment
The combination of economic disruption and increased loss activity during 2008 has significantly reduced insurers' and reinsurers' capital levels. Unlike past periods of capital erosion, the property/casualty industry cannot expect to raise substantial amounts of new capital due to the current economic uncertainty. As a result, underwriting caution has returned to the market place, capacity has decreased and inevitably rates are beginning to rise.
During January 2009 renewals, rates increased substantially for property reinsurance and energy classes of business, and the Group saw positive rate corrections across its risk portfolio. We expect that rates and conditions will continue to harden over time for nearly all of the classes of business that Catlin writes, although it is difficult to pinpoint exactly when rates will rise for each individual class.
We believe that this new market environment will be sustainable. Insurers and reinsurers cannot rely on consistent and substantial profits from invested assets during this period of extreme market volatility, and therefore companies will increasingly focus on underwriting profitability. This represents what can be best described as a lifestyle change for many companies, but is a positive development for the industry a whole.
Catlin is well-prepared to prosper in this new market environment as we have consistently endeavoured to build a business that can adapt quickly to future trends. Our structure - which includes underwriting platforms in London, Bermuda and the United States combined with a truly global network of international offices managed from hubs in Singapore, Cologne and Toronto - is designed both to provide the Group with a well-diversified risk portfolio and to allow us to take advantage of opportunities wherever they may arise. We have continued to develop both Catlin US and the international offices over the past year, opening offices in strategic locations and adding experienced underwriting teams. This investment is important to our future success.
Catlin's increased scale and market leadership position - provided by the successful integration of our acquisition of Wellington Underwriting plc - makes the Group an attractive business partner during uncertain times as clients seek out strong, financially secure insurers. The impact of the economic turmoil on some major insurers and reinsurers will likely benefit the Lloyd's market in particular, due to its strong financial security ratings and its position as the leading marketplace for syndicated insurance business. Catlin, which owns the largest syndicate at Lloyd's, will share in Lloyd's gains.
Overall, we see potential growth in gross premiums written of approximately US$1 billion through 2011.
The Group will also benefit in 2009 and subsequent years from the embedded growth to be created by the Wellington acquisition. The quota share reinsurance of the Catlin Syndicate that had been written by Lloyd's Names who provided capacity to Wellington Syndicate 2020 expired at the end of 2008. As a result, the net premiums earned by Catlin will increase as Catlin will be entitled to 100 per cent of the premiums and related profits of the Catlin Syndicate. In addition, the closure of Syndicate 2020 into the Catlin Syndicate, expected in the first half of 2009, will increase the Group's cash and investments by approximately US$400 million.
2008 results
The Group reported a net loss to common stockholders of US$46.4 million after payment of preferred share dividends (2007: US$461.7 million profit). Return on average equity was negative 2.2 per cent (2007: 20.8 per cent). This performance was primarily the result of the increase in catastrophe and large single-risk losses and a deterioration in investment return:
-
Catlin's underwriting performance was impacted by Hurricane Ike and other large losses which occurred during 2008. In contrast, both 2007 and 2006 had been relatively benign years for losses. The Group's net loss from Hurricanes Ike and Gustav amount to US$250 million, based on an estimated total market loss from Hurricane Ike of US$20 billion or more. Whilst we have increased the original estimate of the Group's loss from Hurricane Ike by approximately 25 per cent, the estimate of the total market loss has increased by at least 33 per cent. Most of the deterioration is related to offshore energy losses; the vast majority of any further deterioration in this book of business will be covered by reinsurance.
-
The loss ratio rose to 62.9 per cent in 2008 (2007: 46.4 per cent). The hurricanes added 10.4 percentage points to the 2008 loss ratio, whilst the increase in large single-risk losses accounted for another 3.1 per cent.
-
The expense ratio decreased to 32.1 per cent (2007: 37.7 per cent), largely driven by proportionately lower administrative expenses.
The Group reported total net investment return of -1.5 per cent wholly due to the volatility in the financial markets (2007: 4.5 per cent). Net losses relating to fixed income investments amounted to US$111.5 million, which reduced total investment return by two percentage points. Net unrealised losses were included in profits in 2008 following a change in accounting treatment; in 2007 unrealised gains and losses on fixed income assets were not included in profits.
In response to investment market conditions, Catlin has adopted a defensive investment position that stresses liquidity. Liquid assets - defined as cash, cash equivalents, government securities and fixed income assets with less than six months to maturity - comprised 60 per cent of Catlin's investment portfolio at 31 December 2008 (2007: 54 per cent), far exceeding the Group's minimum liquidity guideline of 40 per cent.
As a result of this high level of liquidity, Catlin expects to hold its fixed income assets to recovery, thereby eliminating the net unrealised losses.
Focus on underwriting profit
Gross premiums written during 2008 rose by 2 per cent, even though average weighted premium rates fell by 4 per cent across our book of business. Average weighted rates decreased by less than we had anticipated at the start of the year, reflecting our underwriters' discipline in a competitive market. We are pleased with this performance and believe that it illustrates Catlin's 'Underwriting First' mentality, whereby our employees are first and foremost focused on achieving underwriting profitability.
As we had anticipated, gross premiums for business originating in London and the UK decreased because of the competitive market conditions for London wholesale business. However, this decrease was more than offset by increases in gross premiums written by Catlin Bermuda, Catlin US and the international offices. This further demonstrates the advantages of the actions taken by the Group over the past several years to source business outside of the London wholesale market.
Outlook
These are uncertain economic times, but we are certain that significant underwriting opportunities will emerge in 2009 and subsequent years. We anticipate that rate increases will become widespread and that the improvement in underwriting conditions will be sustainable. Catlin is well-positioned to profit from this advantageous environment.
To say 2008 was challenging would be an understatement. However, I am very proud of our employees' performance over the past 12 months, especially in the light of prevailing economic conditions. We have a strong team of professionals, and I would like to take this opportunity to thank them for their hard work.
|
Stephen Catlin |
|
Chief Executive |
|
12 February 2009 |
Underwriting Review
2008: unprecedented challenges
A combination of factors made 2008 one of the most difficult in recent years for insurers and reinsurers worldwide. Those factors included:
-
global economic volatility which caused insurers worldwide to report sharply lower investment returns and forced some insurers to reduce the value of assets significantly;
-
the overall uncertainty created by these economic conditions and their impact on premium volumes and claims;
-
a sharp increase in natural catastrophe and single-risk losses, the combination of which resulted in the second worst year on record for insured catastrophe losses; and
-
a reduction in margins for most classes of business.
Altogether, it is estimated that US property/casualty insurers alone have lost US$55 billion to US$75 billion in capital during 2008 as a result of investment-related losses. In addition, property/casualty insurers and reinsurers worldwide sustained US$50 billion in catastrophe-related losses in 2008.
The volatility in the financial markets has affected insurers and reinsurers in other ways. As 2008 progressed, it became more apparent that Professional Liability and Directors' and Officers' Liability ('D&O') claims arising from the credit crunch could create significant liabilities for insurers, especially those which underwrote coverage for major financial institutions. The economic recession could also have an effect on insurers, both in terms of premium volume and loss experience.
The combination of these events made 2008 a market-changing year, with rates for selected classes of business already hardening at 1 January 2009 renewals. The Group believes that the unusual events of the past 12 months will make the timing, severity and duration of the anticipated market hardening difficult to predict with certainty.
2009: A complicated and changing competitive landscape
Several factors have combined to shape conditions in the property/casualty insurance and reinsurance market, including capital and competition:
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Capital: Following previous 'market changing' events, insurers and reinsurers quickly received substantial amounts of new capital. This capital flowed into the market in various forms, including the formation of new insurers and reinsurers, additional capital raised by existing market players, and the proliferation of 'alternative' capital mechanisms such as catastrophe bonds and reinsurance sidecars.
It is anticipated that capital will be raised by insurers and reinsurers during 2009. However, the volatility in the capital markets means that the amount of additional capital available - or affordable - will be much less than during previous hardening markets.
-
Competition: The events of 2008 have resulted in significant market dislocation, with some prominent insurers and reinsurers facing extreme difficulties. This will lead to new opportunities for the Group and new competitors as other companies attempt to seize on these opportunities. However, the Group believes that these competitors will be fewer in number and more focussed than in previous cycles.
The companies which will prosper in the new market environment will have a strong underwriting track records, broad distribution capabilities and strong capital bases.
The Group believes it is well-positioned to take advantage of the favourable prospects that will likely arise during 2009. As anticipated, gross premiums written by the Group for business originating in London and the UK decreased by 7 per cent during 2008 due to competitive conditions in this market. However, the Group believes that good opportunities will arise during 2009 at Lloyd's, where the Group owns the largest syndicate in the market. The Group believes that the unique advantages of Lloyd's will be increasingly recognised in the light of the ongoing economic crisis. These advantages include:
-
Syndication, which effectively reduces counterparty risk. Lloyd's is the world's largest market for syndicated insurance and reinsurance business.
-
Lloyd's Chain of Security. The Lloyd's market is rated 'A+' (Strong) by Standard & Poor's and 'A' (Excellent) by A.M. Best.
Further growth is anticipated from both Catlin US and the network of international offices following Catlin's significant investment in these operations over the past several years.
2008 loss experience
Insured catastrophe losses nearly doubled in 2008 to an estimated US$50 billion (2007: US$30 billion), making 2008 the second most expensive natural catastrophe year on record.
|
Years with greatest insured catastrophe losses (US$bn) |
|
|
2005 |
107.0 |
|
2008 |
50.8 |
|
2004 |
48.2 |
|
2001 |
36.5 |
|
1999 |
33.6 |
Source: Swiss Re sigma
The 2008 hurricane season was the fourth most severe - both in terms of number of storms and number of major hurricanes - since the onset of reliable data. Hurricane Ike, whilst only a Category 2 hurricane at landfall, is the third-most costly hurricane on record in terms of insured damage, producing significant and unexpected losses, particularly within the Energy market. As shown in the table below, the largest insured natural catastrophe losses during 2008 were caused by weather-related events.
|
Largest insured natural catastrophe losses during 2008 (US$bn) |
|||
|
Event |
Date |
Country |
Insured loss |
|
Hurricane Ike |
6 September 2008 |
US, Caribbean |
20.0 |
|
Hurricane Gustav |
26 August 2008 |
US, Caribbean |
4.0 |
|
Winter Storm Emma |
29 February 2008 |
Europe |
1.4 |
|
Tornadoes, rainfall, hail |
22 May 2008 |
US |
1.3 |
|
Snowstorms, freezing rain |
10 January 2008 |
China |
1.3 |
|
Thunderstorms, wind, hail |
29 May 2008 |
US |
1.1 |
Source: Swiss Re sigma
The earthquake that devastated China's Sichuan Province in May 2008 illustrates the human tragedy and severe damage that earthquakes can cause. Although more than 70,000 people were reported dead and 18,000 missing, most of the estimated US$85 billion of damage was not insured.
There was also a significant increase in large single-risk losses, including man-made catastrophes, during 2008. These types of losses are estimated to have caused more than US$6 billion in insured claims. Although Catlin does not believe that the rise in these types of losses is evidence of any trend, it highlights the potential downside risk facing insurers following several years of relatively benign loss activity.
The first credit crisis claims notifications were filed with insurers writing casualty business during 2008. Industry analysts project that insured claims from E&O and D&O policies covering 2007-2009 will eventually reach US$10 billion. After a review of the Group's risk portfolio, we believe that the impact of these potential claims on Catlin is unlikely to be material.
The extent to which wider recessionary issues will impact longer-tail classes remains difficult to predict. It is likely that casualty classes will see downward pressure on premium revenue and upward pressure on loss activity as company insolvencies and litigation - and the underlying claims frequency - increase. Historically, classes of business connected with companies and professions related to the housing market - such as solicitors, surveyors and valuers - have suffered in particular, and claim notifications related to the economic downturn may be filed during the coming months.
Rate movements
Average weighted premium rates across Catlin's risk portfolio decreased by 4 per cent during 2008 (2007: 4 per cent decrease). This performance was better than the Group anticipated at the start of the year.
The table below shows rate movements for Catlin's overall book of business and for catastrophe and non-catastrophe business since 1999.
|
Rating indexes for catastrophe and non-catastrophe classes of business |
||||||||||
|
|
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
|
Catastrophe business classes |
100% |
107% |
135% |
193% |
212% |
206% |
205% |
256% |
250% |
229% |
|
Non-catastrophe business classes |
100% |
103% |
136% |
175% |
00% |
208% |
205% |
200% |
190% |
187% |
|
Total |
100% |
105% |
135% |
181% |
204% |
206% |
204% |
217% |
209% |
200% |
Rate reductions relating to catastrophe-exposed business classes were greater than during 2007, with a weighted average rate decrease of 8 per cent for the full year (2007: 2 per cent decrease). However, a large proportion of the Group's catastrophe risk portfolio is underwritten during the first half of the year, in advance of the hurricane season.
Conversely, the rate decreases relating to non-catastrophe classes of business flattened during 2008, resulting in an overall decrease in average weighted premium rates of 1 per cent for these classes (2007: 5 per cent decrease).
|
Rating indexes for selected catastrophe classes of business |
||||||||||
|
|
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
|
Energy |
100% |
111% |
148% |
244% |
305% |
279% |
286% |
393% |
372% |
333% |
|
Property Insurance |
100% |
107% |
137% |
188% |
202% |
198% |
194% |
220% |
206% |
191% |
|
Property Reinsurance |
100% |
104% |
120% |
161% |
168% |
165% |
164% |
207% |
211% |
198% |
|
Rating indexes for selected non-catastrophe classes of business |
|||||||||||
|
|
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
|
|
Casualty Insurance |
100% |
101% |
137% |
170% |
222% |
235% |
227% |
215% |
203% |
196% |
|
|
Casualty Reinsurance |
100% |
107% |
129% |
186% |
236% |
266% |
282% |
287% |
276% |
264% |
|
|
War & Political Risk |
100% |
102% |
164% |
262% |
269% |
256% |
240% |
236% |
222% |
233% |
|
|
Specialty |
100% |
106% |
118% |
141% |
154% |
158% |
159% |
158% |
158% |
155% |
|
|
Marine |
100% |
103% |
123% |
155% |
174% |
184% |
188% |
194% |
192% |
192% |
|
|
Aerospace |
100% |
107% |
116% |
135% |
134% |
135% |
130% |
122% |
109% |
108% |
|
Average weighted premium rates for non-catastrophe business generally strengthened as the year progressed, although the impact of these rate movements was moderated by the fact that the Group underwrites lower volumes during the second half of the year. This trend is shown in the table below:
|
Average weighted premium rate increases/(decreases) for non-catastrophe classes in 2008 |
|
|
|
Average |
|
|
weighed rate |
|
|
increase/(decrease) |
|
January |
(3%) |
|
February |
0% |
|
March |
(6%) |
|
April |
(4%) |
|
May |
0% |
|
June |
0% |
|
July |
(4%) |
|
August |
(2%) |
|
September |
2% |
|
October |
(1%) |
|
November |
2% |
|
December |
7% |
|
Total |
(1%) |
Within the Aerospace product group, rates for Airline business had decreased for several years following a period of benign claims experience and a perceived increase in airline safety. However, rates for this class of business increased by 5 per cent to 10 per cent during the fourth quarter of 2008. Including price corrections on the Satellite account in the aftermath of recent losses, overall weighted premium rates for Aerospace business were broadly flat during 2008.
Within the War & Political Risk product group, the number of Credit and Political Risk contracts underwritten has reduced sharply over the past 12 months due to the wider economic climate. However, the contracts that have been written are the subject of significant rate increases.
2008 gross premiums written
Against the backdrop of softening rates during 2008, the gross premiums written by the Group increased by 2 per cent, further highlighting the benefits of Catlin's strategy of diversification and distribution.
The table below shows the breakdown of gross premiums written by source of business:
|
Gross premiums written by source of business |
||||
|
US$m |
2008 |
2007 |
2006 |
2005 |
|
London/UK-originating business |
2,387 |
2,568 |
2,189 |
1,158 |
|
Catlin Bermuda |
392 |
312 |
199 |
155 |
|
Catlin US originating business* |
348 |
297 |
228 |
26 |
|
International offices |
310 |
184 |
106 |
48 |
|
Total |
3,437 |
3,361 |
2,722 |
1,387 |
* Includes business underwritten on behalf of the Catlin Syndicate and Catlin UK
Gross premiums relating to London/UK-originating business decreased by 7 per cent, driven by competitive market conditions across a large part of the portfolio and the non-renewal of business that did not meet rate adequacy levels. However, this decrease was more than offset by a 32 per cent increase in gross premiums written by Catlin Bermuda, Catlin US and the international office network.
Gross premiums written by the international offices rose by 68 per cent, with growth from all regions. A new underwriting office was opened in Munich during 2008, while a representative office was established in Tokyo. A team of D&O underwriters joined the Paris office, while an energy team was added in Calgary and a casualty underwriter was added in the Asia-Pacific region. The representative office in Sao Paulo, which was established in 2007, produced its first business in 2008 following the reform in Brazil's reinsurance laws.
The growth of the international offices is analysed in the table below.
|
Gross premiums written by Catlin international offices |
||||
|
US$m |
2008 |
2007 |
2006 |
2005 |
|
Asia-Pacific |
105 |
66 |
39 |
30 |
|
Europe |
99 |
39 |
17 |
8 |
|
Canada |
53 |
41 |
23 |
4 |
|
Guernsey |
41 |
38 |
27 |
6 |
|
Brazil |
12 |
- |
- |
- |
|
Total |
310 |
184 |
106 |
48 |
The success of the international network is driven by a strategy of employing underwriters and teams with local expertise and relationships in classes of business that Catlin knows and understands.
Catlin US continued to grow, with gross premiums written increasing 17 per cent. Catlin US continued to expand its offerings with the opening of offices in Boston and Los Angeles and the addition of experienced teams writing D&O and Professional Liability business. The further development of the US platform continues to give Catlin an important foothold in the world's largest insurance market.
Premiums written by Catlin Bermuda increased by 26 per cent during 2008.
Risk transfer
The goal of Catlin's risk transfer programme is to reduce the Group's earnings volatility and improve capital efficiency. The programme is designed and executed centrally in order to maximise purchasing power.
The key elements of the programme include:
-
Non-proportional event and aggregate protection to reduce the impact of large and/or frequent catastrophic events;
-
Risk transfer to capital markets to increase the term of protection, diversify and improve greater counterparty financial security, and reduce the volatility in risk transfer costs over time; and
-
Proportional and facultative protection to enhance the Group's gross underwriting capacity.
The Group has a number of in-force capital markets risk transfer transactions, which are described below:
|
Capital market risk transfer transactions |
||||||
|
Issuer |
Domicile |
Perils |
Trigger |
Expiration |
Limit ($m) |
Format |
|
Bay Haven Limited |
Cayman |
US hurricane, US earthquake, UK windstorm, European windstorm, Japanese typhoon, Japanese earthquake |
Coverage for third through ninth eligible events; no eligible events have occurred as at 31 December 2008 |
Nov 2009 |
US$257 |
Swap |
|
Newton Re Series 2007-1 |
Cayman |
US hurricane, US earthquake |
Large single events as measured by Property Claims Services |
Dec 2010 |
US$225 |
Swap |
|
Newton Re Series 2008-1 |
Cayman |
US hurricane, US earthquake, European windstorm, Japanese typhoon, Japanese earthquake |
Annual aggregate reinsurance covering accumulated losses related to property treaty reinsurance |
Dec 2010 |
US$150 |
Reinsurance |
The financial strength of the Group's risk transfer counterparties is of high quality as more of the risk transfer programme is placed with higher-rated and collateralised markets. The financial strength of risk transfer partners is monitored on a regular basis by the Group's Reinsurance Security Committee, which is independent from the reinsurance purchasing team.
The Catlin Syndicate during 2008 was reinsured under a quota share contract with two Lloyd's syndicates capitalised by Lloyd's Names who were formerly members of Wellington Syndicate 2020. This contract ceded approximately 12.5 per cent of net premiums and claims of the Catlin Syndicate for the 2007 and 2008 Lloyd's underwriting years. The contract expired at 31 December 2008.
2009 outlook
The unprecedented events of 2008 have had a significant impact on 2009 renewals.
Positive pricing corrections was witnessed in all of Catlin's product groups during the 1 January renewals, with rate movements more pronounced for some classes of business. Overall, average weighted premium rates increased by 6 per cent across Catlin's risk portfolio.
|
Movement in average weighted premium rates (business incepting 1 January 2009) |
||
|
|
2009 |
2008 |
|
Aerospace |
1% |
(7%) |
|
Casualty |
0% |
(1%) |
|
Energy |
17% |
(5%) |
|
Marine |
3% |
(2%) |
|
Property |
1% |
(6%) |
|
Reinsurance |
9% |
(5%) |
|
Specialty Lines |
2% |
(3%) |
|
War & Political Risk |
3% |
(4%) |
|
Total |
6% |
(5%) |
In response to the catastrophic and single-risk loss experience of 2008, rate increases for Property Reinsurance and Energy classes have been most pronounced as expected, with weighted rate increases of approximately 10 per cent for renewal business. However, other than Property Reinsurance, the majority of business classes are not heavily driven by 1 January renewals. A clearer picture of rate movements for these classes will emerge as the year progresses.
Gross premiums written as at 31 January 2009 increased by 8 per cent compared with the previous year on a constant exchange rate basis.
More significant pricing corrections for catastrophe-exposed business, and the Energy account in particular, are anticipated at the significant 1 April and 1 July renewal dates as the supply and demand for Gulf of Mexico wind-exposed risks is better known. The Group also expects that rates will increase for longer-tail business classes as the true extent of claims resulting from the economic volatility and the impact of wider recessionary issues becomes more clear, with Financial and Professional Indemnity classes responding first, likely during the second half of 2009.
Catlin in recent years has strengthened its position in the marketplace, both through the acquisition of Wellington and our investment in Catlin US and the international offices. Catlin's increased scale, distribution capabilities and leadership role in the marketplace ideally positions the Group to take advantage of what we believe will be significant opportunities in 2009 and future years.
Product groups
The lines of business underwritten by Catlin are arranged into eight product groups. The gross premiums written by each product group, divided by major business categories, are shown below.
|
Gross premiums written by product group (US$m) |
||
|
|
||
|
Aerospace Product Group |
||
|
Aviation |
318 |
|
|
Satellite |
80 |
|
|
|
398 |
|
|
Casualty Product Group |
||
|
General Casualty |
369 |
|
|
Professional Indemnity/Liability |
217 |
|
|
Marine |
91 |
|
|
|
677 |
|
|
Energy Product Group |
||
|
Upstream |
243 |
|
|
Downstream |
48 |
|
|
Liability |
45 |
|
|
|
336 |
|
|
Marine Product Group |
||
|
Specie |
74 |
|
|
Hull |
132 |
|
|
Cargo |
71 |
|
|
|
277 |
|
|
Property Product Group |
||
|
International |
198 |
|
|
US |
98 |
|
|
Binding Authorities |
91 |
|
|
|
387 |
|
|
Reinsurance Product Group |
||
|
Non Proportional Property |
538 |
|
|
Proportional Property |
156 |
|
|
Casualty |
128 |
|
|
Marine |
97 |
|
|
Specialty |
12 |
|
|
|
931 |
|
|
Specialty Lines Product Group |
||
|
Accident & Health |
131 |
|
|
Equine/Livestock |
70 |
|
|
Contingency |
15 |
|
|
|
216 |
|
|
War & Political Risks Product Group |
||
|
War & Political Risks, Terrorism and Credit |
215 |
|
|
Total |
215 |
|
|
|
|
|
|
Catlin Group Total |
3,437 |
|
Catastrophe Threat Scenarios
The Group's tolerance for catastrophe risk is a function of expected profit and available capital. Accumulation of risk is monitored and controlled within a defined underwriting risk appetite strategy in compliance with Board policy and procedures. The Group's defined underwriting risk appetite is intended to limit net exposure from a single event through a diversified portfolio of risk to a maximum of one year's expected profit plus 10 per cent of capital if a 1-in-100 year event occurs, taking into account reinstatement premiums both payable and receivable after an event.
Catlin defines certain catastrophe threat scenarios which reflect selected areas of significant catastrophe exposure. A detailed analysis of these catastrophe threat scenarios is carried out each quarter using statistical models together with input from both actuarial and underwriting functions. Within the statistical models both secondary perils and loss amplification are included.
A selection of modelled outcomes for the Group's most significant catastrophe threat scenarios is detailed in the tables on this page. The modelled outcomes represent the Group's modelled net loss after allowing for all reinsurances, including the external Names' quota share with regard to Catlin Syndicate 2003 which was in place during 2008. The modelled outcomes are not a prediction of actual losses arising from any given scenario (see 'Limitations' below). The modelled outcomes are stated prior to any tax effect.
Modelled gross and net losses
The table below shows the outcomes derived from the internal and external models using data as supplied by our assureds. The modelled outcomes in the table reflect the Group's interpretation of how external models and methods should be applied and are used internally for market consistent comparisons and for regulatory returns, following the instructions given in regulators' guidelines.
|
Examples of catastrophe threat scenarios/Data model output Outcomes derived as at 1 October 2008 |
|||||
|
|
Florida |
|
Gulf of |
|
|
|
|
(Miami) |
California |
Mexico |
European |
Japanese |
|
US$m |
Windstorm |
Earthquake |
Windstorm |
Windstorm |
Earthquake |
|
Estimated industry loss |
119,000 |
74,000 |
102,000 |
31,000 |
50,000 |
|
|
|
|
|
|
|
|
Catlin Group |
|
|
|
|
|
|
Gross loss |
726 |
943 |
1,063 |
540 |
441 |
|
Reinsurance effect (1) |
(478) |
(603) |
(597) |
(137) |
(105) |
|
Modelled net loss |
248 |
340 |
466 |
403 |
336 |
|
|
|
|
|
|
|
|
Modelled net loss as a percentage of net tangible assets (2) |
11% |
15% |
21% |
18% |
15% |
|
(1) Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative |
|||||
|
(2) Net tangible assets amounted to US$2.25 billion at 30 June 2008; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax |
|||||
However, uncertainties exist in the data and the modelling and estimation techniques and include but are not limited to:
-
Economic value of market loss;
-
Insured values and other data as provided by assureds;
-
Non modelled perils;
-
Modelling and parameter uncertainty;
-
Damage factor estimation; and
-
Limited historic validation of model assumptions.
Due to the uncertainties and the range of potential outcomes, Catlin adds a further prudential margin to the modelled output above to reflect the degree of uncertainty in any peril or scenario. These adjusted outcomes are detailed in the table below. These adjusted outcomes are then used to monitor against the Group's risk appetite to add a level of conservatism above the data model outcomes. These adjusted outcomes are also used as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and to measure required capital.
|
Examples of catastrophe threat scenarios/Adjusted data model output Outcomes derived as at 1 October 2008 |
|||||
|
|
Florida |
|
Gulf of |
|
|
|
|
(Miami) |
California |
Mexico |
European |
Japanese |
|
US$m |
Windstorm |
Earthquake |
Windstorm |
Windstorm |
Earthquake |
|
Estimated industry loss |
119,000 |
74,000 |
102,000 |
31,000 |
50,000 |
|
|
|
|
|
|
|
|
Catlin Group |
|
|
|
|
|
|
Gross loss |
945 |
1,132 |
1,332 |
575 |
444 |
|
Reinsurance effect (1) |
(595) |
(697) |
(748) |
(169) |
(105) |
|
Modelled net loss |
350 |
435 |
584 |
406 |
339 |
|
|
|
|
|
|
|
|
Modelled net loss as a percentage of net tangible assets (2) |
16% |
19% |
26% |
18% |
15% |
(1) Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative
(2) Net tangible assets amounted to US$2.25 billion at 30 June 2008; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax
Limitations
The modelling of catastrophe threat scenarios is a complex exercise involving numerous variables and material uncertainty. The modelled output therefore does not constitute a prediction of what losses the Group would incur in the event of a modelled loss occurring.
The modelled outcomes in the tables above are mean losses from a range of potential outcomes. At the mean value, the size of one loss would be contained or nearly contained within the normal expected profits for a year with limited utilisation of capital. Significant variance around the mean is possible. For a given industry loss, there is a wide range of potential outcomes for the Group.
The selected catastrophe threat scenarios are extreme and therefore highly uncertain. Should an event occur, the modelled outcomes may prove inadequate, possibly materially, for a number of reasons (e.g. legal developments, model deficiency, non-modelled risks or data inaccuracies). Data as supplied by our insureds and ceding companies may prove to be inaccurate or could develop during the policy period. Furthermore, the assumptions made during any analysis will evolve following any actual event.
A modelled outcome of net loss from a single event relies in significant part on the reinsurance arrangements in place, or expected to be in place at the time of the analysis, and may change during the year. The modelled outcomes assume that the reinsurance in place responds as expected with minimal reinsurance failure or dispute. Reinsurance is purchased to match the inwards exposure as far as possible, but it is possible for there to be a mismatch or gap in cover which could result in higher than modelled losses to the Group.
Many parts of the reinsurance programme are purchased with limited reinstatements, and therefore the number of claims or events which may be recovered from second or subsequent events is limited. It should also be noted that renewal dates of the reinsurance programme do not necessarily coincide with those of the inwards business written. Where inwards business is not protected by 'risks attaching' reinsurance programmes, the programmes could expire resulting in an increase in the possible net loss retained.
Financial Review
The following pages contain commentary on Catlin's consolidated financial statements for the year ended 31 December 2008, which are prepared in accordance with Accounting Principles Generally Accepted in the US ('US GAAP').
Consolidated Results of Operations
Set out below are the Consolidated Results of Operations for the 2008 year with comparison to the 2007 results.
|
US$000 |
2008 |
2007 |
% change |
|
Revenues |
|
|
|
|
Gross premiums written |
3,437,004 |
3,360,626 |
2 |
|
Reinsurance premiums ceded |
(825,561) |
(787,108) |
5 |
|
Net premiums written |
2,611,443 |
2,573,518 |
1 |
|
Change in unearned premiums |
(15,402) |
(83,984) |
(82) |
|
Net premiums earned |
2,596,041 |
2,489,534 |
4 |
|
|
|
|
|
|
Net investment income |
232,945 |
260,289 |
(11) |
|
Net (losses)/gains on investment in funds |
(212,495) |
29,824 |
NM |
|
Net losses on fixed maturities and short-term investments |
(111,488) |
- |
NM |
|
Net realised losses on investments available for sale |
- |
(78,970) |
NM |
|
Change in fair value of derivatives |
(12,527) |
(30,088) |
(58) |
|
Net realised losses on foreign currency exchange |
(20,631) |
(4,035) |
NM |
|
Other income |
14,991 |
23,354 |
(36) |
|
Total revenues |
2,486,836 |
2,689,908 |
(8) |
|
Expenses |
|
|
|
|
Losses and loss expenses |
1,631,837 |
1,154,670 |
41 |
|
Policy acquisition costs |
510,238 |
530,972 |
(4) |
|
Administrative and other expenses |
357,312 |
460,898 |
(22) |
|
Total expenses |
2,499,387 |
2,146,540 |
16 |
|
|
|
|
|
|
(Loss)/income before income taxes |
(12,551) |
543,368 |
(102) |
|
Minority interest |
23 |
8 |
NM |
|
Income tax benefit/(expense) |
9,639 |
(59,790) |
116 |
|
Net (loss)/income |
(2,889) |
483,586 |
(101) |
|
Preferred share dividend |
(43,500) |
(21,868) |
99 |
|
Net (loss)/income available to common stockholders |
(46,389) |
461,718 |
(110) |
|
|
|
|
|
|
Loss ratio(1) |
62.9% |
46.4% |
|
|
Expense ratio(2) |
32.1% |
37.7% |
|
|
Combined ratio(3) |
95.0% |
84.1% |
|
|
Tax rate(4) |
NM |
11.0% |
|
|
Return on average equity(5) |
(2.2)% |
20.8% |
|
NM Not meaningful
(1) Calculated as losses and loss expenses divided by net premiums earned
(2) Calculated as the total of policy acquisition costs, administrative expenses and other expenses, less financing expenses and restructuring costs, divided by net premiums earned
(3) Total of loss ratio plus expense ratio
(4) Calculated as income tax benefit/(expense) divided by (loss)/income before income taxes
(5) Calculated as net (loss)/income available to common stockholders divided by the weighted average of opening and closing stockholders' equity (excluding preferred shares)
Catlin's 2008 financial results were affected by a number of factors:
-
Catlin adopted a new accounting standard, FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, effective 1 January 2008. With the adoption of FAS 159, unrealised gains and losses on fixed income investments now flow directly through the Statement of Operations and therefore are included in the Group's profits. In 2007 US$30 million (net of tax) of net unrealised gains on fixed income investments earned did not impact the Group's profits.
-
Substantial volatility in global investment markets has caused significant unrealised losses in the Group's investment portfolio. The total investment return for 2008 was a loss of US$91 million. This included net losses on the valuation of fixed income and short-term investment assets amounting to US$111 million.
The adoption of FAS 159 does not affect the overall calculation of net investment return, which traditionally has included unrealised gains and losses relating to fixed income assets. However, because of the adoption of FAS 159, total investment return is now included in profit before tax; previously net unrealised gains or losses on fixed income assets were reported in stockholders' equity.
-
The US dollar has strengthened against sterling by more than 25 per cent during the year. Although US dollars account for the majority of the Group's cash flows, a significant part of the remainder are in sterling. The Group also has sterling net investments in the Catlin Syndicate and Catlin UK. Catlin has therefore incurred exchange losses on open transactions and balances, including net investments, primarily as a result of sterling's weakness in the second half of 2008. This does not affect net income but has reduced stockholders' equity.
-
The Group incurred losses of approximately US$250 million arising from Hurricanes Ike and Gustav; Catlin did not incur any hurricane-related losses during 2007. In addition, there was a markedly higher incidence of large single-risk losses in 2008 compared with 2007. As a result of these and other factors, the Group's loss ratio increased to 62.9 per cent (2007: 46.4 per cent).
The following commentary compares Catlin's 2008 results with the results for 2007.
Gross premiums written
Gross premiums written increased by 2 per cent to US$3.4 billion.
The Group experienced weighted average rate decreases of approximately 4 per cent for business incepting during 2008, although rates remained adequate for nearly all classes of business. In addition, Catlin's network of international offices exceeded growth targets, contributing new, diversified business to the Group's risk portfolio.
Reinsurance
Reinsurance premiums ceded include both premiums ceded in respect of third-party protections purchased by the Group and premiums ceded under a quota share contract with two syndicates capitalised by Lloyd's Names who formerly provided capital to Wellington Syndicate 2020. This quota share contract ceded approximately 12.5 per cent of premiums earned by the Catlin Syndicate for the 2007 and 2008 Lloyd's underwriting years of account, net of brokerage and certain other acquisition costs.
Reinsurance premiums ceded are analysed below.
|
US$000 |
2008 |
Percentage of GPW |
2007 |
Percentage of GPW |
|
Third-party protections |
568,641 |
17% |
549,652 |
16% |
|
Names' quota share |
256,920 |
7% |
237,456 |
7% |
|
|
825,561 |
24% |
787,108 |
23% |
|
Element of multi-year contracts relating to future periods |
(65,958) |
(2%) |
- |
- |
|
|
759,603 |
22% |
787,108 |
23% |
Third-party reinsurance costs expressed as a percentage of written premiums were approximately 1 percentage point higher than in 2007. The reinsurance programme for 2008 was restructured to take advantage of the synergies available to the combined Catlin and Wellington business portfolio. The combined portfolio benefited from reduced costs for reinsurance, reflective of softening reinsurance rates in 2008. However, during the year a number of long-term contracts covering 2008 and future years were purchased; these contacts had not been purchased in previous years. The element of the multi-year contracts which relate to future periods, approximately US$66 million, is included in reinsurance premiums ceded, but has no impact on earned premiums, and therefore profits, in 2008.
Net premiums earned
Growth in premiums earned lags the increase in premiums written when a company is growing. This was particularly notable for Catlin during 2007 because a significant element of premiums earned related to premiums written in respect of the 2006 and previous Lloyd's underwriting years of account by Wellington Syndicate 2020. This effect was less significant during 2008. However, the Names' quota share reinsurance described above ceased at the end of 2008, which will result in continued embedded growth in Catlin's net premiums earned during 2009 through 2011.
In addition, the reinsurance to close of Syndicate 2020 into the Catlin Syndicate, which is expected during the first half of 2009, will increase the Group's investment assets and loss and loss expense reserves by approximately US$400 million.
Losses and loss expenses
Losses and loss expenses increased by US$477 million in 2008, resulting in an increase in the loss ratio to 62.9 per cent (2007: 46.4 per cent). Losses relating to Hurricanes Ike and Gustav amounted to approximately $250 million net of reinsurance and reinstatement premiums, increasing the loss ratio by 10.4 percentage points. In addition, single-risk loss experience during 2008 was higher than anticipated.
Consistent with the Group's conservative reserving approach, reserve redundancies - in respect of the 2003 to 2007 accident years in particular - led to a total release of US$118 million from prior years' reserves during 2008.
The increase in the Group's loss ratio during 2008 is analysed in the table below:
|
Attritional loss ratio |
54.0% |
|
Hurricane losses |
10.4% |
|
Increase in large single-risk losses |
3.1% |
|
Release of reserves |
(4.6%) |
|
Reported loss ratio |
62.9% |
Policy acquisition costs, administrative and other expenses
The expense ratio amounted to 32.1 per cent (2007: 37.7 per cent). The expense ratio comprises a number of components as illustrated in the table below.
|
US$000 |
2008 |
Components of expense ratio |
2007 |
Components of expense ratio |
|
Policy acquisition costs |
510,238 |
19.6% |
530,972 |
21.4% |
|
Administrative expenses |
324,320 |
12.5% |
406,633 |
16.3% |
|
Financing costs |
18,126 |
- |
21,508 |
- |
|
Integration costs |
14,866 |
- |
32,757 |
- |
|
|
867,550 |
32.1% |
991,870 |
37.7% |
The policy acquisition cost ratio decreased to 19.6 per cent (2007: 21.4 per cent). This primarily reflects the mix of business underwritten during 2008.
Administrative expenses represent 12.5 percentage points of the overall expense ratio (2007: 16.3 percentage points). The most significant element of administrative expenses is staff-related costs, which represent approximately 68.3 per cent of the total (2007: 59.7 per cent). As a result of the net loss reported by the Group in 2008, management and staff bonuses - which are based, in part, on the return on average equity achieved by the Group - were significantly lower than in 2007. In addition, the valuation of entitlements under share option schemes also decreased during 2008, resulting in a release of accruals booked in prior periods due to changes in assumptions relating to ultimate vesting. Finally, a significant part of administrative and other expenses are incurred in sterling, the movement of which against the dollar gave rise to savings in dollar terms.
Financing costs do not affect the expense ratio. These costs comprise interest and other costs in respect of bank financing, together with costs of subordinated debt. Also included are the issue and other costs associated with the catastrophe swap derivative transactions entered into in 2007 and 2008, explained more fully in Note 9 to the Financial Statements. Dividends relating to preferred shares are treated as an appropriation of net income and are not included in financing costs.
Integration costs associated with the implementation of the Wellington acquisition do not represent a component of the Group's ongoing expense base and therefore are not reflected in the expense ratio. Integration costs incurred in 2008 amounted to $15 million (2007: US$33 million) and related primarily to personnel and systems integration. All integration costs relating to the Wellington acquisition have now been incurred.
Total investment return
The table below summarises the total return on investments and cash during the year. As described above, Catlin adopted the Fair Value Option under FAS 159, resulting in the total return on investments being reported in net income for 2008 and subsequent years. In 2007, net unrealised gains of US$36 million (US$30 million net of tax effects) were reported in other comprehensive income within stockholders' equity.
|
US $000 |
2008 |
2007 |
|
Total investments and cash as at 31 December |
5,933,413 |
6,001,144 |
|
|
|
|
|
Net investment income |
232,945 |
260,289 |
|
Net (losses)/gains on investments in funds |
(212,495) |
29,824 |
|
Net losses on fixed maturities and short-term investments |
(111,488) |
- |
|
Net realised losses on investments available for sale |
- |
(78,970) |
|
Total investment return in income |
(91,038) |
211,143 |
|
Net unrealised gains/(losses) on investments (reported in OCI) |
- |
36,423 |
|
Total investment return |
(91,038) |
247,566 |
|
Total return on average investments |
(1.5%) |
4.5% |
Change in fair value of derivatives
As part of its third-party reinsurance arrangements, the Group has entered into catastrophe swap arrangements with certain special purpose entities. Information about these arrangements is contained in the Underwriting Review and Note 9 to the Financial Statements.
The change in fair value of these swaps during 2008 is shown in the table below:
|
US $000 |
2008 |
2007 |
|
Premiums in respect of catastrophe swaps |
(28,228) |
(14,464) |
|
Change in value of catastrophe swaps |
15,701 |
(8,480) |
|
Other |
- |
(7,144) |
|
|
(12,527) |
(30,088) |
The fair value of the swaps is based on the inverse of the value of the bonds issued by the special purpose entities. The value of the bonds has reduced in the current economic climate, and therefore the value of the swaps has increased.
Net realised loss on foreign currency
During 2008 Catlin reported a loss on foreign currency exchange amounting to US$21 million (2007: US$4 million). This loss was primarily due to the 27 per cent fall in the sterling-US dollar exchange rate to 1.46 at year-end 2008 (31 December 2007: 1.99). Catlin reports its financial results in US dollars but undertakes significant sterling transactions. It also owns operating and financing subsidiaries which have accounting (functional) currencies which are not dollars, the largest of which is sterling. The Group therefore incurs net exchange losses on transactions and open balances, including net investments, during a period of sterling weakness.
Other income
In 2008 and 2007 most of the other income reported related to fees charged to third-party Lloyd's Names by Syndicate 2020. The Syndicate's 2006 year, which will close in early 2009, is the last year that has third-party Name participation; most of the fees chargeable to the third-party Names have therefore been recognised.
Income tax benefit/(expense)
The Group incurred losses in its taxable jurisdictions and as a result had a consolidated tax benefit of $10 million in 2008 (2007: $60 million tax expense, or 11.0 per cent effective tax rate).
In periods of marginal profitability, the effective tax rate is not meaningful. The principal driver of the effective tax rate continues to be where among the Group's four platforms profits and losses fall.
Balance Sheets
A summary of the balance sheets at 31 December 2008 and 2007 is set out below.
|
US$000 |
2008 |
2007 |
% change |
|
Investments and cash |
5,933,413 |
6,001,144 |
(1) |
|
Securities lending collateral |
32,899 |
44,662 |
(26) |
|
Intangible assets and goodwill |
650,748 |
884,428 |
(26) |
|
Premiums and other receivables |
1,079,551 |
1,052,849 |
3 |
|
Reinsurance recoverable |
1,225,631 |
1,012,781 |
21 |
|
Deferred acquisition costs |
247,529 |
247,171 |
- |
|
Other assets |
489,880 |
357,810 |
37 |
|
|
|
|
|
|
Loss reserves |
(4,606,256) |
(4,237,525) |
9 |
|
Unearned premiums |
(1,536,203) |
(1,506,899) |
2 |
|
Subordinated debt |
(97,881) |
(100,825) |
(3) |
|
Reinsurance payable |
(476,485) |
(232,004) |
105 |
|
Other liabilities |
(440,692) |
(461,169) |
(4) |
|
Securities lending payable |
(32,899) |
(44,662) |
(26) |
|
Minority interest |
- |
(757) |
(100) |
|
Stockholders' equity |
2,469,235 |
3,017,004 |
(18) |
The chart below shows the principal components of the change in stockholders' equity during the year:
|
US$000 |
|
|
Stockholders' equity, 1 January 2008 |
3,017,004 |
|
Net loss |
(2,889) |
|
Common share dividends declared |
(124,429) |
|
Preferred share dividends declared |
(43,500) |
|
Currency translation loss (Change in other comprehensive income) |
(325,048) |
|
Other, including treasury share purchases |
(51,903) |
|
Stockholders' equity, 31 December 2008 |
2,469,235 |
The currency translation loss results from the significant portion of the Group's stockholders' equity being represented by sterling entities, Sterling entities such as Catlin UK, the Catlin Syndicate and certain intermediate holding companies comprise a significant portion of Catlin's consolidated stockholders equity. A currency translation loss arose when the sterling net assets of these companies were translated at year-end into the Group's reporting currency, which is US dollars.
The largest sterling assets owned by the Group are the intangibles arising on the acquisition of Wellington and the buyout of the Names, both of which primarily related to the purchase of sterling assets. As a result, over 60 per cent of the currency translation loss relates to intangible assets.
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 when there is a 100 basis point step up in the interest cost based on LIBOR at that time. These shares represent a capital instrument which is eligible as regulatory capital for Catlin Bermuda and innovative 'Tier 1' capital under the rules of the FSA in the UK.
The amount attributable to preferred shareholders is US$590 million such that the per share amounts attributable to common shareholders are as set out below.
|
US$000 |
2008 |
2007 |
|
Total stockholders' equity |
2,469,235 |
3,017,004 |
|
Less: attributable to preferred shares |
(589,785) |
(589,785) |
|
|
1,879,450 |
2,427,219 |
|
|
|
|
|
Book value per share (US$) |
$7.57 |
$9.59 |
|
Book value per share (sterling) |
£5.18 |
£4.82 |
|
|
|
|
|
Net tangible assets per share (US$) |
$5.30 |
$6.57 |
|
Net tangible assets per share (sterling) |
£3.63 |
£3.30 |
The growth in sterling book value per share illustrates the material effect of the movement in the dollar-to-sterling exchange rate during 2008. Sterling book value per share growth is relevant when considering Catlin's market value, which is denominated in sterling. Tangible book value per share in sterling increased by 10 per cent in 2008, whilst total book value grew by 7 per cent.
The Group believes that its capital resources at 31 December 2008 are sufficient to fund the embedded growth arising from the Wellington acquisition. The Group had a small surplus of economic capital at that date. It had a significant surplus of regulatory capital, whilst its capital position as viewed by rating agencies was stable.
Investments and cash
Investments and cash decreased by US$68 million or 1 per cent to US$5.9 billion (2007: US$6.0 billion).
Cash and cash equivalents increased by $300 million, but this was offset by fair value decreases on investments of US$368 million.
Securities lending
Catlin has continued a securities lending arrangement which was commenced in early 2006. Under this arrangement certain of the fixed maturity investments are loaned to third parties through a lending agent. The Group maintains control over the securities it lends, retains the earnings and cash flows associated with the loaned securities, and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required to be established by the borrower at a minimum rate of 102 per cent of the market value of the loaned securities; this is monitored and maintained by the lending agent.
There was a reduced level of lending during the year, largely reflecting lower fair values as well as reduced holdings by the Group of the types of government securities which are commonly lent.
Intangible assets and goodwill
The decrease in intangible assets and goodwill during the year resulted primarily from foreign exchange effects since the majority of the intangibles and goodwill are denominated in sterling and arose on the acquisition of Wellington. The following table sets out the principal components of this asset.
|
US$000 |
2008 |
2007 |
|
Purchased Lloyd's syndicate capacity |
571,427 |
778,867 |
|
Distribution network |
2,190 |
3,980 |
|
Surplus lines licenses |
7,158 |
8,535 |
|
Goodwill on acquisition of Wellington |
56,773 |
75,576 |
|
Other goodwill |
13,200 |
17,475 |
|
|
650,748 |
884,433 |
The amounts relating to the distribution network and surplus lines licenses are amortised over their estimated useful lives. However, the larger part of the balance is not amortised because it is considered to have an indefinite life, but is subject to annual impairment tests. The decline in value of this asset during 2008 was almost wholly due to foreign exchange effects since the underlying purchase of Wellington and the related acquisition of Names' capacity were sterling transactions.
Catlin is required under US GAAP to establish a liability for deferred taxation in relation to the value of intangible assets and goodwill arising on the Wellington acquisition. This liability is included in 'other liabilities' and amounts to US$87 million (2007: US$119 million), with the decline in value due to foreign exchange effects.
Premiums and other receivables
Premiums and other receivables increased during 2008 by US$27 million or 3 per cent. This growth is in line with the increase in premiums written during the year compared with 2007.
Reinsurance recoverable
Amounts receivable, and anticipated recoveries from reinsurers, rose by US$213 million or 21 per cent. Reinsurance recoverables represent 50 per cent of stockholders' equity (2007: 34 per cent). This is largely due to amounts recoverable on the Names' quota share contract, which is on a funds withheld basis. Balances will not be settled until the contract is commuted. The Names' quota share contract covers the 2007 and 2008 underwriting years and therefore two years of balances have accumulated.
Deferred acquisition costs
Deferred acquisition costs represented 16 per cent of unearned premiums at 31 December 2008 (2007: 16 per cent).
Loss reserves
Gross loss reserves have increased by US$369 million or 9 per cent during 2008, reflecting reserves relating to Hurricanes Ike and Gustav as well as the increased level of single-risk losses during the year.
The Group has seen a steady emergence of surplus from prior accident years. More than 90 per cent of net reserves relate to the 2003 and later accident years, all of which have had good developmental experience. Catlin continues to set loss reserves conservatively relative to the best estimates from the Group's independent actuarial advisor, reflecting the inherent uncertainties in estimating insurance liabilities.
The Group released US$118 million from prior year loss reserves during 2008, an amount equal to approximately 3 per cent of opening net reserves.
Unearned premiums
Unearned premiums have increased by US$29 million or 2 per cent during the year, in line with the growth in written premiums during the year.
Notes payable and subordinated debt
The subordinated debt represented a total of US$68 million and €18 million 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 are 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 during the year primarily because the Names' quota share contract is on a funds withheld basis, and balances will not be settled until the contract is commuted. The Names' quota share contract covers the 2007 and 2008 underwriting years and therefore two years of balances have accumulated.
Loss Reserve Development
Reserves for losses and loss expenses
Catlin maintains a conservative reserving philosophy. The Group sets loss reserves conservatively relative to the Group's independent actuarial advisor's best estimate, reflecting the inherent uncertainties in estimating insurance liabilities.
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:
-
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 large losses;
-
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 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 year 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 estimate of ultimate net losses has 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 large losses as detailed below. Development over time of net paid claims is also shown, including and excluding these large claims.
All historic premium and claim amounts have been restated using exchange rates as at 31 December 2008 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 Wellington acquisition 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.
With effect from 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. When the 2006 underwriting year closes, by way of reinsurance to close, the Group will then be responsible for 100 per cent of the liabilities of Syndicate 2020 and will receive consideration of equivalent value. This is expected to take place in early 2009.
The main bodies of the tables below show premium and reserves at the 100 per cent level for any Wellington business, unless otherwise stated. An adjustment for any external share of these reserves is then shown separately.
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
Surplus has continued to emerge from each of the accident years 2003 through to 2007 and also from the Legacy Wellington reserves. This surplus has more than offset the reserve deterioration seen on the Legacy Catlin reserves for 2002 and prior accident years. The reserves from the 2002 and prior accident years represent only 10 per cent of the Group's net reserves at 31 December 2008.
A summary of the Group's net reserves is shown in below.
|
Summary of Catlin Group net reserves at 31 December 2008 (US$m) |
||||
|
Accident Year |
Catlin net reserves |
Legacy Wellington net reserves(1) |
Total net reserves |
% of total net reserves |
|
2002 and prior |
180 |
178 |
358 |
10% |
|
2003 |
62 |
40 |
102 |
3% |
|
2004 |
85 |
74 |
159 |
5% |
|
2005 |
145 |
274 |
419 |
12% |
|
2006 |
216 |
188 |
404 |
11% |
|
2007(2) |
656 |
85 |
741 |
21% |
|
2008(2) |
1,325 |
13 |
1,338 |
38% |
|
Sub-total |
2,669 |
852 |
3,521 |
100% |
|
Other net reserves (3) |
|
|
15 |
0% |
|
Total net reserves |
|
|
3,536 |
100% |
(1) Catlin share of Legacy Wellington accident year net reserves estimated in line with Catlin's share of relevant underwriting period
(2) Catlin net reserves after external quota share
(3) Other net reserves include other outwards reinsurance, unallocated claims handling expenses, potential reinsurance failure and disputes and foreign exchange adjustments
Development tables
|
Estimated ultimate net losses (US$m) |
||||||||||
|
|
|
Accident Year |
||||||||
|
|
Wellington Accident Years 2006 and prior |
2002 and prior |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
Total |
|
|
Net premiums earned |
|
|
917 |
1,155 |
1,181 |
1,276 |
2,740 |
2,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net ultimate excluding large losses |
||||||||||
|
Initial estimate(1) |
5,896 |
1,514 |
416 |
536 |
578 |
623 |
1,361 |
1,596 |
|
|
|
One year later |
5,861 |
1,532 |
400 |
473 |
524 |
584 |
1,341 |
|
|
|
|
Two years later |
5,735 |
1,544 |
373 |
451 |
482 |
569 |
|
|
|
|
|
Three years later |
|
1,583 |
373 |
424 |
461 |
|
|
|
|
|
|
Four years later |
|
1,596 |
363 |
414 |
|
|
|
|
|
|
|
Five years later |
|
1,608 |
361 |
|
|
|
|
|
|
|
|
Net ultimate loss ratio excluding large losses |
||||||||||
|
Initial estimate |
|
|
45.4% |
46.4% |
48.9% |
48.8% |
49.7% |
59.1% |
|
|
|
One year later |
|
|
43.6% |
41.0% |
44.4% |
45.8% |
48.9% |
|
|
|
|
Two years later |
|
|
40.7% |
39.0% |
40.8% |
44.6% |
|
|
|
|
|
Three years later |
|
|
40.7% |
36.7% |
39.0% |
|
|
|
|
|
|
Four years later |
|
|
39.6% |
35.8% |
|
|
|
|
|
|
|
Five years later |
|
|
39.4% |
|
|
|
|
|
|
|
|
Net ultimate large losses |
||||||||||
|
Initial estimate (1) |
|
20 |
|
116 |
334 |
|
|
254 |
|
|
|
One year later |
|
19 |
|
117 |
386 |
|
|
|
|
|
|
Two years later |
|
19 |
|
118 |
397 |
|
|
|
|
|
|
Three years later |
|
19 |
|
117 |
401 |
|
|
|
|
|
|
Four years later |
|
20 |
|
121 |
|
|
|
|
|
|
|
Five years later |
|
23 |
|
|
|
|
|
|
|
|
|
Net ultimate including large losses |
||||||||||
|
Initial estimate(1) |
5,896 |
1,534 |
416 |
652 |
912 |
623 |
1,361 |
1,850 |
|
|
|
One year later |
5,861 |
1,551 |
400 |
590 |
910 |
584 |
1,341 |
|
|
|
|
Two years later |
5,735 |
1,563 |
373 |
569 |
879 |
569 |
|
|
|
|
|
Three years later |
|
1,602 |
373 |
541 |
862 |
|
|
|
|
|
|
Four years later |
|
1,616 |
363 |
535 |
|
|
|
|
|
|
|
Five years later |
|
1,631 |
361 |
|
|
|
|
|
|
|
|
Net ultimate loss ratio including large losses |
||||||||||
|
Initial estimate |
|
|
45.4% |
56.5% |
77.2% |
48.8% |
49.7% |
68.5% |
|
|
|
One year later |
|
|
43.6% |
51.1% |
77.0% |
45.8% |
48.9% |
|
|
|
|
Two years later |
|
|
40.7% |
49.3% |
74.4% |
44.6% |
|
|
|
|
|
Three years later |
|
|
40.7% |
46.8% |
73.0% |
|
|
|
|
|
|
Four years later |
|
|
39.6% |
46.3% |
|
|
|
|
|
|
|
Five years later |
|
|
39.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net paid |
4,605 |
1,451 |
299 |
450 |
717 |
353 |
489 |
394 |
8,758 |
|
|
Estimated net ultimate claims |
5,735 |
1,631 |
361 |
535 |
862 |
569 |
1,341 |
1,850 |
12,884 |
|
|
Estimated net claim reserves |
1,130 |
180 |
62 |
85 |
145 |
216 |
852 |
1,456 |
4,126 |
|
|
External share of Wellington net reserves |
-376 |
|
|
|
|
|
-42 |
-6 |
-424 |
|
|
External quota share |
|
|
|
|
|
|
-69 |
-112 |
-181 |
|
|
Estimated net claim reserves |
754 |
180 |
62 |
85 |
145 |
216 |
741 |
1,338 |
3,521 |
|
|
Other reserves (2) |
|
|
|
|
|
|
|
|
15 |
|
|
Booked reserves |
|
|
|
|
|
|
|
|
3,536 |
|
(1) Initial estimates for 2002 and prior shown as at 31 December 2003; initial estimates for Wellington accident years 2006 and prior are shown as at the date of business combination
(2) Other net reserves include other outwards reinsurance, unallocated claims handling expenses, potential reinsurance failure and disputes and foreign exchange adjustments
|
Net paid losses (US$m) |
||||||||||
|
|
|
Accident Year |
||||||||
|
|
Wellington |
|
|
|
|
|
|
|
||
|
|
accident years |
2002 and |
|
|
|
|
|
|
||
|
|
2006 and prior |
prior |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
||
|
Net premiums earned |
|
|
917 |
1,155 |
1,181 |
1,276 |
2,740 |
2,699 |
||
|
|
|
|
|
|
|
|
|
|
||
|
Net paid excluding large losses |
||||||||||
|
Initial estimate (1) |
3,740 |
1,066 |
94 |
125 |
118 |
155 |
231 |
293 |
||
|
One year later |
4,223 |
1,189 |
168 |
219 |
223 |
265 |
489 |
|
||
|
Two years later |
4,605 |
1,280 |
224 |
277 |
284 |
353 |
|
|
||
|
Three years later |
|
1,332 |
252 |
308 |
339 |
|
|
|
||
|
Four years later |
|
1,393 |
276 |
331 |
|
|
|
|
||
|
Five years later |
|
1,430 |
299 |
|
|
|
|
|
||
|
Net paid loss ratio excluding large losses |
||||||||||
|
Initial estimate |
|
|
10.3% |
10.8% |
10.0% |
12.1% |
8.4% |
10.8% |
||
|
One year later |
|
|
18.3% |
19.0% |
18.9% |
20.8% |
17.8% |
|
||
|
Two years later |
|
|
24.4% |
24.0% |
24.0% |
27.7% |
|
|
||
|
Three years later |
|
|
27.5% |
26.7% |
28.7% |
|
|
|
||
|
Four years later |
|
|
30.1% |
28.7% |
|
|
|
|
||
|
Five years later |
|
|
32.6% |
|
|
|
|
|
||
|
Net paid large losses |
||||||||||
|
Initial estimate (1) |
|
8 |
|
72 |
94 |
|
|
101 |
||
|
One year later |
|
13 |
|
113 |
248 |
|
|
|
||
|
Two years later |
|
15 |
|
116 |
347 |
|
|
|
||
|
Three years later |
|
19 |
|
117 |
378 |
|
|
|
||
|
Four years later |
|
19 |
|
119 |
|
|
|
|
||
|
Five years later |
|
21 |
|
|
|
|
|
|
||
|
Net paid including large losses |
||||||||||
|
Initial estimate (1) |
3,740 |
1,074 |
94 |
197 |
212 |
155 |
231 |
394 |
||
|
One year later |
4,223 |
1,202 |
168 |
332 |
471 |
265 |
489 |
|
||
|
Two years later |
4,605 |
1,295 |
224 |
393 |
631 |
353 |
|
|
||
|
Three years later |
|
1,351 |
252 |
425 |
717 |
|
|
|
||
|
Four years later |
|
1,412 |
276 |
450 |
|
|
|
|
||
|
Five years later |
|
1,451 |
299 |
|
|
|
|
|
||
|
Net paid loss ratio including large losses |
||||||||||
|
Initial estimate |
|
|
10.3% |
17.1% |
18.0% |
12.1% |
8.4% |
14.6% |
||
|
One year later |
|
|
18.3% |
28.7% |
39.9% |
20.8% |
17.8% |
|
||
|
Two years later |
|
|
24.4% |
34.0% |
53.4% |
27.7% |
|
|
||
|
Three years later |
|
|
27.5% |
36.8% |
60.7% |
|
|
|
||
|
Four years later |
|
|
30.1% |
39.0% |
|
|
|
|
||
|
Five years later |
|
|
32.6% |
|
|
|
|
|
||
(1) Initial estimates for 2002 and prior shown as at 31 December 2003; initial estimates for Wellington accident years 2006 and prior are shown as at the date of business combination
The tables above exclude other outwards reinsurance, unallocated claims handling expenses, potential reinsurance failure and disputes and foreign exchange adjustments.
Large Losses
The following events are included in the large loss sections of the tables above.
|
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 |
The large loss component of Wellington for accident periods prior to the business combination are not included in the large loss estimates shown in the tables above.
Hurricane Gustav, a 2008 event, is not recorded as a large loss in the accident year development tables as it is deemed too small an event for the Group.
Commentary on development tables
Accident year 2008
The loss ratio is above prior years at the same stage of development, reflecting a higher than anticipated frequency of large risk losses.
Accident year 2007
The loss ratio has shown a small improvement during the year.
Accident years 2003 to 2006
The loss ratios continue to develop favourably and consistently with recent accident periods.
Accident years 2002 and prior
There has been a small deterioration in these accident periods during 2008. This has mainly arisen from exposure to UK motor excess of loss reinsurance reflecting the potential increased cost of structured settlements within the UK.
Wellington accident periods 2006 and prior
The reserves in these periods have developed favourably in the aggregate during the year.
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 provide a historical perspective on the changes in the estimates of the claims liabilities established in previous years and the estimated profitability of recent years, users 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 levels which are conservative relative to the Group's independent actuarial advisor's 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.
Investments
Investment markets worldwide during 2008 were impacted by unprecedented levels of volatility. This volatility increased markedly in the final quarter of 2008, when returns on all asset classes except government bonds were negatively impacted.
The Group's total net investment return for 2008 (including net unrealised losses) deteriorated as the year progressed to negative 1.5% at year-end (2007: 4.5 per cent). Total investment return includes US$111.5 million of net losses relating to fixed income investments. These net unrealised losses reduced total investment return by approximately 2 percentage points.
The total cumulative unrealised gains held in the fixed income portfolio as at 31 December 2008 amounted to US$92.2 million; total cumulative unrealised losses amounted to US$197.5 million. As a result of the high level of liquidity in the investment portfolio, the Group expects to hold its fixed income assets to recovery, thereby eliminating the net unrealised losses.
In view of the risk inherent in such a volatile investment environment, Catlin adopted a defensive investment position during 2008. First, liquidity levels were increased. Second, as the year progressed, the Group chose not to increase its investment in diversified assets nor to maintain existing percentage allocations in this asset category. Third, Catlin decided not to reinvest in asset-backed securities ('ABS') and mortgage-backed securities ('MBS') as existing securities matured.
The Group is maintaining this strategy of liquidity and defensive asset allocations whilst the instability in global financial markets continues.
Investment portfolio
At 31 December 2008 Catlin's total cash and investments amounted to US$5.9 billion (2007: US$6.0 billion).
|
Investment allocation by major category at 31 December |
||
|
|
2008 |
2007 |
|
Cash |
40% |
35% |
|
Fixed income |
49% |
51% |
|
Diversified investments |
11% |
14% |
Fixed income instruments (fixed maturities and global bond fund) accounted for 49 per cent of the Group's total cash and investments at 31 December 2008 (2007: 51 per cent), whilst cash and cash equivalents accounted for 40 per cent (2007: 35 per cent) and diversified investments accounted for 11 per cent (2007: 14 per cent).
The percentage of total cash and investments held in liquid assets - defined as cash, cash equivalents, government securities and fixed income securities with less than six months to maturity - increased during 2008 to 60 per cent at 31 December (2007: 54 per cent). This compares with the Catlin's internal liquidity guidelines, which call for a minimum 40 per cent of cash and investments to be held in liquid assets.
Catlin's investment managers invest in a variety of fixed income instruments, including government securities, corporate bonds and securities backed by assets including mortgages, loans and other forms of credit instruments. The breakdown of the Group's investment assets by detailed category is shown below.
|
Investment allocation by detailed category at 31 December |
||
|
|
2008 |
2007 |
|
Cash |
40% |
35% |
|
Global Bond Fund |
2% |
2% |
|
ABS |
4% |
7% |
|
CMBS |
3% |
4% |
|
Agency MBS |
5% |
5% |
|
Non-agency RMBS |
3% |
5% |
|
Government & agencies |
20% |
19% |
|
Corporate |
9% |
9% |
|
Corporate FDIC |
3% |
0% |
|
Funds of funds |
10% |
13% |
|
Equities |
1% |
1% |
The percentage of corporate bonds in Catlin's portfolio increased during 2008 to 12 per cent (2007: 9 per cent) as a result of Catlin's decision to invest in bonds guaranteed by the US Federal Deposit Insurance Corporation.
The duration of the fixed income bond portfolio at 31 December 2008 was 2.7 years (2007: 2.7 years). Eighty-four percent of fixed income investments was denominated in US dollars at 31 December 2008, whilst 7 per cent was sterling, 5 per cent was Canadian dollars and 4 per cent was euros (2007: 82 per cent US dollars; 8 per cent sterling; 6 per cent Canadian dollars; 4 per cent euros).
Asset-backed securities accounted for 4 per cent of the portfolio at 31 December 2008 (2007: 7 per cent). Mortgage-backed securities, including Agency MBS, amounted to 11 per cent of the portfolio (2007:14 per cent)
Although the reduction in the amount of ABS/MBS instruments held during 2008 is partly attributable to decreases in values that resulted in unrealised losses, the Group also consciously reduced its ABS/MBS holdings by not reinvesting in these instruments as they matured.
The ABS and MBS securities held by the Group consist of senior-rated tranches which are well-protected against current and potentially severe future economic conditions. All of the agency-backed MBS instruments held by the Group now have explicit support from the US federal government, which provides this portion of the asset portfolio with additional protection.
The fixed income investments are of high quality: 80 per cent of the fixed-income portfolio is invested in government and agency instruments or are rated 'AAA', with the balance predominantly rated 'A' or higher.
|
Fixed maturities by rating |
|
|
|
|
||
|
31 December 2008 |
Allocation |
Government/ agency1 |
AAA |
AA |
A |
BBB or lower |
|
ABS |
4% |
- |
88% |
6% |
3% |
3% |
|
Agency MBS |
5% |
100% |
- |
- |
- |
- |
|
Non-agency RMBS1 |
3% |
- |
85% |
6% |
3% |
6% |
|
CMBS(1) |
3% |
- |
96% |
2% |
2% |
- |
|
Corporate(2) |
12% |
24% |
6% |
17% |
50% |
3% |
|
US government and agency |
2% |
100% |
- |
- |
- |
- |
|
Other government and agency |
8% |
100% |
- |
- |
- |
- |
|
Total |
47% |
58% |
22% |
5% |
13% |
2% |
|
|
|
|
|
|
|
|
|
31 December 2007 |
|
|
|
|
|
|
|
ABS |
7% |
- |
97% |
1% |
1% |
1% |
|
Agency MBS |
5% |
100% |
- |
- |
- |
- |
|
Non-agency RMBS(1) |
5% |
- |
96% |
4% |
- |
- |
|
CMBS(1) |
4% |
- |
91% |
5% |
4% |
- |
|
Corporate(2) |
9% |
- |
8% |
32% |
55% |
5% |
|
US government and agency |
12% |
100% |
- |
- |
- |
- |
|
Other government and agency |
7% |
100% |
- |
- |
- |
- |
|
Total |
49% |
51% |
33% |
6% |
9% |
1% |
(1) RMBS - residential mortgage-backed securities, CMBS - commercial mortgage-backed securities (collectively MBS - mortgage-backed securities)
(2) Includes FDIC-guaranteed corporate bonds
The Group's holdings in diversified assets at 31 December 2008 consists of an internal fund of funds composed of 25 individual hedge funds across a diversified set of managers, strategies and underlying asset classes; six separate funds of funds managed by two managers; and two equity funds. The composition of the Group's diversified assets in relation to total cash and investments is shown below.
|
Diversified assets at 31 December |
||
|
|
2008 |
2007 |
|
|
|
|
|
Internal fund of funds |
7% |
10% |
|
External funds of funds |
3% |
3% |
|
Equity funds |
1% |
1% |
|
Total |
11% |
14% |
The Group limits new investments in an individual fund to no more than 0.5 per cent of total cash and investments. The liquidity profile of the diversified investments is such that equity funds are realisable within a month, the fund of funds within three months and 50 per cent of the internal fund of funds within 180 days.
Investment performance
The Group's investment performance during 2008 by major asset category is analysed below.
|
Investment performance by major category |
||
|
|
Allocation at |
Return |
|
Fixed maturities |
46.6% |
1.2% |
|
Global bond fund |
2.2% |
0.9% |
|
Cash |
40.1% |
3.7% |
|
Diversified assets |
|
|
|
Equity funds - US |
0.8% |
(40.2%) |
|
Equity funds - global |
0.5% |
(39.7)% |
|
Internal fund of funds |
7.2% |
(21.7%) |
|
External funds of funds |
2.6% |
(18.9%) |
|
|
|
|
|
Net return on average investments |
|
(1.5%) |
Despite the high credit quality of the portfolio, the Group's return on its fixed income portfolio during 2008 was significantly impacted by unrealised losses as spreads widened to unprecedented levels across all non-government asset categories. The Group intends to hold these securities until recovery due to the high liquidity level within its portfolio.
The Group's equity funds performed poorly during 2008, although equities accounted for only approximately 1 per cent of total cash and investments at year-end. Market volatility significantly reduced the returns produced by the internal and external funds of funds, although these funds' performance was superior to that of the equity funds. Some individual funds did produce positive returns; however, this performance was negated by losses by the other funds.
Estimated net return on average investments during January 2009 amounted to 0.4 per cent, or 4.3 per cent on an annualised basis.
Outlook
Investment volatility has continued into 2009, and there is little sign to date of a return to market stability. In the light of this environment, the Group will maintain its defensive investment strategy, including high levels of liquidity. In addition, Catlin will maintain its allocation to diversified assets at existing levels while current volatile market conditions remain.
Consolidated Financial Statements
For the Years Ended 31 December 2008 and 2007
(Expressed in US dollars)
|
|
2008 |
2007 |
|
Assets |
|
|
|
Investments |
|
|
|
Fixed maturities, at fair value |
|
|
|
Short-term investments, at fair value |
68,982 |
47,605 |
|
Investments in funds, at fair value |
800,787 |
946,418 |
|
Investment in associate |
- |
2,537 |
|
Total investments |
3,577,990 |
3,945,510 |
|
|
|
|
|
Cash and cash equivalents |
2,355,423 |
2,055,634 |
|
Securities lending collateral |
32,899 |
44,662 |
|
Accrued investment income |
31,211 |
37,274 |
|
Premiums and other receivables |
1,079,551 |
1,052,849 |
|
Reinsurance recoverable |
1,225,631 |
1,012,781 |
|
Reinsurers' share of unearned premiums |
302,157 |
224,235 |
|
Deferred policy acquisition costs |
247,529 |
247,171 |
|
Intangible assets and goodwill |
650,748 |
884,428 |
|
Derivatives, at fair value |
6,602 |
9,035 |
|
Other assets |
149,910 |
87,266 |
|
Total assets |
$9,659,651 |
$9,600,845 |
|
|
|
|
|
Liabilities, Minority Interest and Stockholders' Equity |
|
|
|
Liabilities: |
|
|
|
Reserves for losses and loss expenses |
$4,606,256 |
$4,237,525 |
|
Unearned premiums |
1,536,203 |
1,506,899 |
|
Reinsurance payable |
476,485 |
232,004 |
|
Accounts payable and other liabilities |
247,203 |
227,228 |
|
Subordinated debt |
97,881 |
100,825 |
|
Derivatives, at fair value |
17,163 |
9,099 |
|
Securities lending payable |
32,899 |
44,662 |
|
Deferred tax liability (net) |
176,326 |
224,842 |
|
Total liabilities |
$7,190,416 |
$6,583,084 |
|
|
|
|
|
Minority interest |
- |
757 |
|
|
2008 |
2007 |
|
Stockholders' equity |
|
|
|
Ordinary common stock |
$2,552 |
$2,531 |
|
Preferred shares |
589,785 |
589,785 |
|
Additional paid-in capital |
1,623,842 |
1,622,876 |
|
Treasury stock |
(55,186) |
(5,849) |
|
Accumulated other comprehensive (loss)/income |
(300,652) |
38,820 |
|
Retained earnings |
608,894 |
768,841 |
|
Total stockholders' equity |
2,469,235 |
3,017,004 |
|
Total liabilities, minority interest and stockholders' equity |
$9,659,651 |
$9,600,845 |
The accompanying notes are an integral part of the consolidated financial statements.
Approved by the Board of Directors on 12 February 2009
Stephen Catlin
Director
Christopher Stooke
Director
|
|
2008 |
2007 |
|
Revenues |
|
|
|
Gross premiums written |
$3,437,004 |
$3,360,626 |
|
Reinsurance premiums ceded |
(825,561) |
(787,108) |
|
Net premiums written |
2,611,443 |
2,573,518 |
|
Change in net unearned premiums |
(15,402) |
(83,984) |
|
Net premiums earned |
2,596,041 |
2,489,534 |
|
Net investment income |
232,945 |
260,289 |
|
Net (losses)/gains on investments in funds |
(212,495) |
29,824 |
|
Net losses on fixed maturities and short-term investments |
(111,488) |
- |
|
Net realised losses on investments available for sale |
- |
(78,970) |
|
Change in fair values of derivatives |
(12,527) |
(30,088) |
|
Net realised losses on foreign currency exchange |
(20,631) |
(4,035) |
|
Other income |
14,991 |
23,354 |
|
Total revenues |
2,486,836 |
2,689,908 |
|
|
|
|
|
Expenses |
|
|
|
Losses and loss expenses |
1,631,837 |
1,154,670 |
|
Policy acquisition costs |
510,238 |
530,972 |
|
Administrative and other expenses |
357,312 |
460,898 |
|
Total expenses |
2,499,387 |
2,146,540 |
|
Net (loss)/income before minority interest and income tax expense |
(12,551) |
543,368 |
|
Minority interest |
23 |
8 |
|
Income tax benefit/(expense) |
9,639 |
(59,790) |
|
Net (loss)/income |
(2,889) |
483,586 |
|
Preferred share dividend |
(43,500) |
(21,868) |
|
Net (loss)/income available to common stockholders |
$(46,389) |
$461,718 |
|
|
|
|
|
Earnings per common share |
|
|
|
Basic |
$(0.19) |
$1.84 |
|
Diluted |
$(0.19) |
$1.74 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Additional |
|
|
other |
Total |
|
|
Common |
Preferred |
paid-in |
Treasury |
Retained |
comprehensive |
stockholders' |
|
|
stock |
shares |
capital |
stock |
earnings |
(loss)/income |
equity |
|
Balance 1 January 2007 |
$2,383 |
$- |
$1,610,725 |
$(6,600) |
$437,862 |
$(26,090) |
$2,018,280 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
- |
- |
- |
- |
461,718 |
- |
461,718 |
|
Other comprehensive income |
- |
- |
- |
- |
- |
64,910 |
64,910 |
|
Total comprehensive income |
- |
- |
- |
- |
461,718 |
64,910 |
526,628 |
|
Issuance of common shares in connection with acquisition of Wellington |
|
|
|
|
|
|
|
|
Issuance of preferred shares |
- |
589,785 |
- |
- |
- |
- |
589,785 |
|
Stock compensation expense |
- |
- |
13,668 |
- |
- |
- |
13,668 |
|
Stock options and warrants exercised |
|
|
|
|
|
|
|
|
Dividends |
- |
- |
- |
- |
(126,860) |
- |
(126,860) |
|
Deferred compensation obligation |
|
|
|
|
|
|
|
|
Treasury stock purchased |
- |
- |
- |
(4,497) |
- |
- |
(4,497) |
|
Distribution of treasury stock held by Employee Benefit Trust |
|
|
|
|
|
|
|
|
Balance 31 December 2007 |
$2,531 |
$589,785 |
$1,622,876 |
$(5,849) |
$768,841 |
$38,820 |
$3,017,004 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FAS159 |
|
|
|
|
14,424 |
(14,424) |
|
|
Net loss to common stockholders |
- |
- |
- |
- |
(46,389) |
- |
(46,389) |
|
Other comprehensive loss |
- |
- |
- |
- |
- |
(325,048) |
(325,048) |
|
Total comprehensive loss |
- |
- |
- |
- |
(31,965) |
(339,472) |
(371,437) |
|
Stock compensation benefit |
- |
- |
(1,777) |
- |
- |
- |
(1,777) |
|
Stock options and warrants exercised |
21 |
|
|
|
|
|
|
|
Dividends |
- |
- |
- |
- |
(124,429) |
- |
(124,429) |
|
Deferred compensation obligation |
|
|
|
|
|
|
|
|
Treasury stock purchased |
- |
- |
- |
(50,126) |
- |
- |
(50,126) |
|
Distribution of treasury stock held by Employee Benefit Trust |
|
|
|
|
|
|
|
|
Balance 31 December 2008 |
$2,552 |
$589,785 |
$1,623,842 |
$(55,186) |
$608,894 |
$(300,652) |
$2,469,235 |
|
|
2008 |
2007 |
|
Cash flows (used in)/provided by operating activities |
|
|
|
Net (loss)/income |
$(2,889) |
$483,586 |
|
Adjustments to reconcile net (loss) income to net cash provided by operations: |
|
|
|
Amortisation and depreciation |
22,198 |
18,733 |
|
Amortisation on net discounts of fixed maturities |
(4,260) |
(3,450) |
|
Net losses on investments |
323,983 |
49,146 |
|
Changes in operating assets and liabilities |
|
|
|
Reserves for losses and loss expenses |
731,316 |
174,357 |
|
Unearned premiums |
157,794 |
198,928 |
|
Premiums and other receivables |
(124,021) |
520,649 |
|
Deferred policy acquisition costs |
(23,962) |
(101,131) |
|
Value of in-force business acquired |
- |
120,705 |
|
Reinsurance payable |
285,134 |
388,945 |
|
Reinsurance recoverable |
(355,400) |
(349,302) |
|
Reinsurers' share of unearned premiums |
(121,979) |
(118,384) |
|
Accounts payable and other liabilities |
36,833 |
(351,312) |
|
Deferred taxes |
13,788 |
136,545 |
|
Other |
(19,707) |
(208,643) |
|
Net cash flows provided by operating activities |
918,828 |
959,372 |
|
|
|
|
|
Cash flows (used in)/provided by investing activities |
|
|
|
Purchases of fixed maturities |
(1,393,257) |
(2,918,053) |
|
Proceeds from sales of fixed maturities |
1,359,981 |
2,593,971 |
|
Proceeds from maturities of fixed maturities |
49,981 |
139,295 |
|
Net proceeds from purchases, sales and maturities of short-term investments |
(21,131) |
(34,984) |
|
Cash flows arising from investment in associate |
6,892 |
1,064 |
|
Purchase of subsidiaries, net of cash acquired |
- |
(40,909) |
|
Purchases of investment in funds |
(84,000) |
(551,210) |
|
Redemptions of investments in funds |
7,049 |
- |
|
Purchases of intangible assets |
- |
68 |
|
Purchases of property and equipment |
(11,673) |
(21,247) |
|
Proceeds from sales of property and equipment |
85 |
1,808 |
|
Investment of securities lending collateral, net |
11,763 |
96,991 |
|
Net cash flows used in investing activities |
(74,310) |
(733,206) |
|
|
2008 |
2007 |
|
Cash flows (used in)/provided by financing activities |
|
|
|
Dividends paid on common stock |
(125,691) |
(124,586) |
|
Net proceeds from issue of preferred shares |
- |
589,785 |
|
Dividends paid on preferred shares |
(43,500) |
(21,868) |
|
Repayment of notes payable |
- |
(550,290) |
|
Securities lending collateral repaid |
(11,763) |
(96,991) |
|
Purchase of treasury stock |
(50,127) |
(4,582) |
|
Net cash flows used in financing activities |
(231,081) |
(208,532) |
|
Net increase in cash and cash equivalents |
613,437 |
17,634 |
|
Cash and cash equivalents - beginning of year |
2,055,634 |
1,987,882 |
|
Effect of exchange rate changes |
(313,648) |
50,118 |
|
Cash and cash equivalents - end of year |
$2,355,423 |
$2,055,634 |
|
|
|
|
|
Supplemental cash flow information |
|
|
|
Taxes (received)/paid |
$(9,481) |
$20,140 |
|
Interest paid |
$7,093 |
$8,031 |
|
Cash and cash equivalents comprise the following: |
|
|
|
Cash at bank and in hand |
$2,028,461 |
$1,611,718 |
|
Cash equivalents |
$326,962 |
$443,916 |
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 as the 'Group', Catlin underwrites specialty classes of insurance and reinsurance on a global basis.
The Group consists of four underwriting platforms:
-
Catlin Syndicate, which operates at Lloyd's of London;
-
Catlin Bermuda (Catlin Insurance Company Ltd.);
-
Catlin UK (Catlin Insurance Company (UK) Limited); and
-
Catlin US, which is the trading name for the Company's various subsidiaries in the United States. Catlin US includes Catlin Inc. as well as two insurance companies: Catlin Insurance Company Inc. and Catlin Specialty Insurance Company Inc.
At 31 December 2008, the Company, through intermediate companies, also had established operations in Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Guernsey, Italy, Japan, Malaysia, Singapore, Spain and Switzerland.
Through its subsidiaries, the Company writes a broad range of products, including property, casualty, energy, marine and aerospace insurance products and property, catastrophe and per-risk excess, non-proportional treaty, aviation, marine, casualty and motor reinsurance business. Business is written from many countries, although business from the United States predominates.
On 18 December 2006, the Company declared unconditional its offer to acquire all of the issued and to be issued share capital of Wellington Underwriting plc ('Wellington').
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, deferred policy acquisition costs, reinsurance recoverables, valuation of investments, intangible assets and goodwill. The accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, commissions and other policy acquisition costs. 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.
Certain insignificant reclassifications have been made to prior year amounts to conform to the 2008 presentation.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. 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 '$').
Investments in fixed maturities and short term investments
The Group's investments in 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 securities due to mature between 90 days and one year from the date of purchase.
Net investment income includes interest income together with amortisation of market 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.
Effective 1 January 2008, the Group applied the fair value option permitted by the Financial Accounting Standards Board ('FASB') Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ('FAS 159') to its fixed maturities and short-term investments. In 2008, following the adoption of FAS 159, all gains or losses on fixed maturities and short-term investments are included in net income. In 2007 realised gains or losses were included in net income and unrealised gains or losses were included in accumulated other comprehensive income in stockholders' equity, subject to impairment as discussed below. On adoption of FAS 159, unrealised gains have been reclassified from accumulated other comprehensive income to opening retained earnings as at 1 January 2008.
Other than temporary impairments
In 2007, prior to adoption of FAS 159, the Group regularly monitored its investment portfolio to ensure that investments that may have been other than temporarily impaired were identified in a timely fashion and properly valued, and that any impairments were charged against net income (through net realised losses on investments) in the proper period. The Group's decision to make an impairment provision was based on regular objective reviews of the issuer's current financial position and future prospects, its financial strength rating and an assessment of the probability that the current market value would recover to former levels and required the judgment of management. In assessing the potential recovery of market value for debt securities, the Group also took into account the timing of such recovery by considering whether it had the ability and intent to hold the investment to the earlier of (a) settlement or (b) market price recovery. Any security whose price decrease was deemed other-than-temporary was written down to its then current market level and the cumulative net loss previously recognised in stockholders' equity was removed and charged to net income. Inherently, there were risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, financial market disruption or unforeseen events which affect one or more companies, industry sectors or countries could have resulted in additional write-downs in future periods for impairments that were deemed to be other-than-temporary. Additionally, unforeseen catastrophic events may have required the Group to sell investments prior to the forecast market price recovery. In 2008, following adoption of FAS 159, all unrealised gains and losses are recorded in the income statement and therefore the Group is no longer required to assess whether investments are other than temporarily impaired.
Investments in funds
The Group's investments in funds are considered to be trading and are carried at fair value. The fair value is based on either the net asset value provided by the funds' administrators or, where available, the quoted market price of the funds. Management assesses the reasonableness of the valuation principles that the administrators use as described in the funds prospectus and articles of association. The gains or losses resulting from changes in fair value are included within net income.
Investment in associate
Investment in associate comprised an investment in a limited liability corporation which was disposed of in 2008. This investment was accounted for using the equity method.
Derivatives
In accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ('FAS 133'), 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.
The fair values of the catastrophe swap agreements described in Note 9 are determined by management using internal models based on the valuation of the underlying notes issued by the counterparty. The determination of the fair values takes into account changes in the market for catastrophic reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date. The fair values of other derivative financial instruments are derived from independent valuation sources.
Cash and cash equivalents
Cash equivalents are carried at cost, which approximates fair value, and include all investments with original maturities of 90 days or less.
Securities lending
Certain entities within the Group participate 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 income in the Consolidated Statements of Operations.
Premiums
Premiums written are primarily earned on a daily pro rata basis over the terms of the policies to which they relate. 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.
For multi-year policies written which are payable in annual instalments, and where the insured or reinsured has the ability to commute or cancel coverage within the term of the policy, only the annual premium is included as written premium at policy inception. Annual instalments are included as written premium at each successive anniversary date within the multi-year term.
Reinstatement premiums are recognised and fully earned as they fall due.
Deferred policy acquisition costs
Certain policy acquisition costs, consisting primarily of commissions and premium taxes, that vary with and are primarily related to the production of premium, are deferred and amortised over the period in which the related premiums are earned.
A premium deficiency is recognised immediately by a charge to net income 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. 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 (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 principals. 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, the extent to which all claims have been reported, and internal claims processing charges. The process used in establishing reserves cannot be exact, particularly for liability 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.
Reinsurance
In the ordinary course of business, the Company's insurance subsidiaries cede reinsurance 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 obligation to its insureds. Reinsurance premiums ceded are recognised and commissions thereon are earned over the period that the reinsurance coverage is provided.
Reinstatement premiums are recorded and fully expensed as they fall due. Return premiums due from reinsurers are included in premiums and other receivables in the Consolidated Balance Sheets.
Reinsurers' share of unearned premiums represents the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force.
Reinsurance recoverables include the balances due from reinsurance companies for paid and unpaid losses and loss expenses that will be recovered from reinsurers, based on contracts in force. A reserve for uncollectible reinsurance has been determined based upon a review of the financial condition of the reinsurers and an assessment of other available information.
Contract deposits
Contracts written by the Group which are not deemed to transfer significant underwriting and/or timing risk are accounted for as contract deposits and are included in premiums and other receivables. Liabilities are initially recorded at an amount equal to the assets received and are included in accounts payable and other liabilities in the Consolidated Balance Sheets.
The Group uses the risk-free rate of return of equivalent duration to the liabilities in determining risk transfer and records the transactions using the interest method. The Group periodically reassesses the estimated ultimate liability. Any changes to this liability are reflected as an adjustment to interest expense to reflect the cumulative effect of the period the contract has been in force and by an adjustment to the future internal rate of return of the liability over the remaining estimated contract term.
Goodwill and intangible assets
Goodwill represents the excess of acquisition costs over the net fair values of identifiable assets acquired and liabilities assumed in a business combination. Pursuant to Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets ('FAS 142'), goodwill is deemed to have an indefinite life and is not amortised, but rather tested at least annually for impairment.
The goodwill impairment test has two steps. The first step identifies potential impairments by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not required. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down would be recorded. The measurement of fair values of the reporting units is determined based on an evaluation of a number of factors, including ranges of future discounted earnings. Certain key assumptions considered include forecasted trends in revenues, operating expenses and effective tax rates.
Intangible assets are valued at their fair value at the time of acquisition. The Group's intangible assets relate to the purchase of syndicate capacity, the distribution network and admitted as well as surplus lines licenses.
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 are considered to have a finite life and are amortised over their estimated useful lives of five years. Distribution channels are amortised over their 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 change in net income.
Other assets
Other assets include prepaid items, property and equipment and income tax recoverable.
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of four to ten years for fixtures and fittings, four years for automobiles and two years for computer equipment. Leasehold improvements are amortised over the life of the lease or the life of the improvement, whichever is shorter. Computer software development costs are capitalised when incurred and depreciated over their estimated useful lives of five years.
Comprehensive income/(loss)
Comprehensive income/(loss) represents all changes in equity that result from recognised transactions and other economic events during the period. Other comprehensive income/(loss) refers to revenues, expenses, gains and losses that are included in comprehensive income/(loss) but excluded from net income/(loss), such as foreign currency translation adjustments.
Foreign currency translation and transactions
Foreign currency translation
The presentation 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 statements of operations 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 revalued at period-end rates of exchange, with the resulting gains and losses included in income. Revenues and expenses denominated in foreign currencies are translated at average rates of exchange for the period.
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 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 Group accounts for stock-based compensation arrangements under the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004), Accounting for Stock-Based Compensation ('FAS 123R').
The fair value of options is calculated at the date of grant based on the Black-Scholes Option Pricing Model. The corresponding compensation charge is recognised on a straight-line basis over the requisite service period.
The fair value of non-vested shares is calculated on the grant date based on the share price and the exchange rate in effect on that date and is recognised on a straight-line basis over the vesting period. This calculation is updated on a regular basis to reflect revised expectations and/or actual experience.
Warrants
In 2002, the Group issued convertible preference shares with detachable stock purchase warrants. The preference shares were converted into common shares in 2004. The portion of the proceeds allocable to the warrants has been accounted for as additional paid-in capital. This allocation was based on the relative fair values of the two securities at the time of issuance. Warrant contracts are classified as equity so long as they meet all the conditions of equity outlined in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. Subsequent changes in fair value are not recognised in the Statement of Operations 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.
As a result of the acquisition of Wellington in December 2006, the Group also sponsors a defined benefit pension scheme which was closed to new members in 1993. The recorded asset related to the plan was set equal to the value of plan assets in excess of the defined benefit obligation at the date of the business combination.
Risk and uncertainties
In addition to the risks and uncertainties associated with unpaid losses and loss expenses described above and in Note 7, cash balances, investment securities and reinsurance recoveries are exposed to various risks, such as interest rate, market, foreign exchange and credit risks. Due to the level of risk associated with investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risks in the near term would materially affect the amounts reported in the financial statements. 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 diversification provisions are in place governing the Group's reinsurance programme. Management believes that there are no significant concentrations of credit risk associated with its investments and its reinsurance programme.
New accounting pronouncements
Effective 1 January 2008, the Group adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements ('FAS 157'). FAS 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value under US GAAP more consistent and comparable. FAS 157 requires expanded disclosures about the Group's assets and liabilities that are carried at fair value, as described in Note 5. The adoption of FAS 157 did not result in any cumulative-effect adjustment to the Group's opening retained earnings at 1 January 2008, or any material impact on the Group's results of operations, financial position or liquidity.
Effective 1 January 2008, the Group adopted FAS 159. FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value with gains and losses recorded in the statement of operations. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Group elected to adopt the FAS 159 fair value option to its available for sale investment portfolio. On adoption of FAS 159, net unrealised gains of $14,424, after allowing for tax effects, have been reclassified from accumulated other comprehensive income to opening retained earnings as at 1 January 2008.
In October 2008 the FASB issued the FASB Staff Position Statement of Financial Accounting Standard No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active ('FAS 157-3'), clarifying the application of FAS 157 in a market that is not active. It offers an illustrative example of the valuation of a security in an inactive market as guidance. FAS 157-3 is effective upon issuance. The adoption of FAS 157-3 has not resulted in a material effect on the Group's financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R) ('FAS 158'). This statement requires recognition of the overfunded or underfunded status of defined benefit pension and other postretirement plans as an asset or liability in the balance sheet and changes in that funded status to be recognised in comprehensive income in the year in which the changes occur. FAS 158 also require measurement of the funded status of a plan as at the balance sheet date. The recognition provisions of FAS 158 are effective for reporting periods ending after 15 December 2006, while the measurement date provisions are effective for reporting periods ending after 15 December 2008. The adoption of the measurement date provisions of FAS 158 in 2009 will not have a material effect on the Group's financial position or results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (R), Business Combinations - a replacement of Statement of Financial Accounting Standard No. 141 ('FAS 141R'), which changes the principles and requirements for how the acquirer of a business recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognising and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively for fiscal years beginning after 15 December 2008. The Group will adopt FAS 141R in 2009. The adoption of FAS 141R is not expected to have a material effect on the Group's current financial position or results of operations but may affect future acquisitions.
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ('FAS 160'). This statement establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosures to be on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. This statement is effective prospectively, except for certain retrospective disclosure requirements, for reporting periods beginning after 15 December 2008. The Group will adopt FAS 160 in 2009. The adoption of FAS 160 is not expected to have a material effect on the Group's financial position or results of operations.
In March 2008 the FASB issued Statement of Financial Accounting Standard No. 161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment to Statement of Financial Accounting Standard No. 133 ('FAS 161'). FAS 161 establishes the disclosure requirements for derivative instruments and for hedging activities. The Standard requires expanded disclosure of how and why an entity uses derivative instruments, how derivatives and related hedged items are accounted for under FAS 133 and its related interpretation, and how derivatives and related hedged items affect an entity's financial position, financial performance and cash flows. FAS 161 is effective for financial statements issued for fiscal years beginning after 15 November 2008; however, early adoption is encouraged. The Group will adopt FAS 161 in 2009. The adoption of FAS 161 is not expected to have a material effect on the Group's financial position.
In May 2008 FASB issued Statement of Financial Accounting Standard No. 162, The Hierarchy of Generally Accepted Accounting Principles ('FAS 162'). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP. FAS 162 is effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of FAS 162 will not have a material effect on the Group's financial position or results of operations.
3 Segmental information
The Group determines its reportable segments by platform, consistent with the manner in which results are reviewed by management. The four reportable segments are:
-
Catlin Syndicate, which comprises direct insurance and reinsurance business underwritten by the Group's syndicates at Lloyd's;
-
Catlin Bermuda, which primarily underwrites reinsurance business, excluding intra-Group reinsurance;
-
Catlin UK, which primarily underwrites direct insurance; and
-
Catlin US, which primarily underwrites specialty business in the United States.
At 31 December 2008, there were four intra-Group reinsurance contracts in place: the 50 per cent Corporate Quota Share ('CQS'), which cedes Catlin Syndicate risk to Catlin Bermuda; the 60 per cent Quota Share contract ('CUK QS') which cedes Catlin UK risk to Catlin Bermuda; and also two 75 per cent Quota Share contracts ('CUS QS') which cede Catlin US risk 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 operating segment for the year ended 31 December 2008 is as follows:
|
|
Catlin Syndicate |
Catlin Bermuda |
Catlin UK |
Catlin US |
Total |
|
Gross premiums written |
$2,416,416 |
$391,781 |
$486,420 |
$142,387 |
$3,437,004 |
|
Reinsurance premiums ceded |
(682,998) |
(61,189) |
(61,259) |
(20,115) |
(825,561) |
|
Net premiums written |
1,733,418 |
330,592 |
425,161 |
122,272 |
2,611,443 |
|
Net premiums earned |
1,792,979 |
304,101 |
407,429 |
91,532 |
2,596,041 |
|
Losses and loss expenses |
(1,097,575) |
(159,477) |
(310,757) |
(64,028) |
(1,631,837) |
|
Policy acquisition costs |
(339,088) |
(63,150) |
(88,030) |
(19,970) |
(510,238) |
|
Net underwriting contribution |
$356,316 |
$81,474 |
$8,642 |
$7,534 |
$453,966 |
Net underwriting contribution by operating segment for the year ended 31 December 2007 is as follows:
|
|
Catlin Syndicate |
Catlin Bermuda |
Catlin UK |
Catlin US |
Total |
|
Gross premiums written |
$2,537,904 |
$311,976 |
$439,440 |
$71,306 |
$3,360,626 |
|
Reinsurance premiums ceded |
(665,581) |
(48,151) |
(69,427) |
(3,949) |
(787,108) |
|
Net premiums written |
1,872,323 |
263,825 |
370,013 |
67,357 |
2,573,518 |
|
Net premiums earned |
1,903,044 |
228,647 |
305,198 |
52,645 |
2,489,534 |
|
Losses and loss expenses |
(835,089) |
(88,925) |
(200,010) |
(30,646) |
(1,154,670) |
|
Policy acquisition costs |
(399,137) |
(43,427) |
(72,649) |
(15,759) |
(530,972) |
|
Net underwriting contribution |
$668,818 |
$96,295 |
$32,539 |
$6,240 |
$803,892 |
Of total revenue as reported in the Group's Consolidated Statement of Operations, only net premiums earned are measured and managed on a segmental basis.
Assets are reviewed in total by management for purposes of decision making. The Group does not allocate assets to its segments.
4 Investments
Fair value option
As described in Note 2, the Group elected to apply the fair value option to its available for sale investment portfolio with effect from 1 January 2008. Fixed maturity and short-term investments reported at 31 December 2008 are carried at fair value with gains and losses reported in income. The comparative balances as at 31 December 2007 represent securities classified as available for sale.
Fixed maturities
The fair values and amortised costs of fixed maturities at 31 December 2008 and 2007 are as follows:
|
|
2008 |
|
2007 |
|
|
|
Fair value |
Amortised cost |
Fair value |
Amortised cost |
|
US government and agencies |
$673,323 |
$629,536 |
$721,952 |
$704,623 |
|
Non-US governments |
394,211 |
372,393 |
424,098 |
426,520 |
|
Corporate securities |
763,420 |
775,923 |
529,906 |
527,476 |
|
Asset-backed securities |
256,702 |
289,867 |
428,508 |
429,438 |
|
Mortgage-backed securities |
620,565 |
745,835 |
844,486 |
840,660 |
|
Total fixed maturities |
$2,708,221 |
$2,813,554 |
$2,948,950 |
$2,928,717 |
$273,473 (2007: $289,091) of the total mortgage-backed securities at 31 December 2008 are 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 ratings agencies is as follows:
|
|
|
2008 |
|
2007 |
|
|
Fair value |
% |
Fair value |
% |
|
US government and agencies |
$673,323 |
25 |
$721,952 |
24 |
|
Non-US governments |
394,211 |
15 |
424,098 |
14 |
|
AAA |
1,102,689 |
41 |
1,305,150 |
45 |
|
AA |
134,098 |
5 |
182,208 |
6 |
|
A |
364,421 |
13 |
285,556 |
10 |
|
BBB |
31,678 |
1 |
27,174 |
1 |
|
Other |
7,801 |
- |
2,812 |
- |
|
Total fixed maturities |
$2,708,221 |
100 |
$2,948,950 |
100 |
The gross unrealised gains and losses related to fixed maturities at 31 December 2008 and 2007 are as follows:
|
|
2008 |
2007 |
||
|
|
Gross unrealised |
Gross unrealised |
Gross unrealised |
Gross unrealised |
|
|
gains |
losses |
gains |
losses |
|
US government and agencies |
$45,781 |
$1,994 |
$17,409 |
$80 |
|
Non-US governments |
21,818 |
- |
3,243 |
5,665 |
|
Corporate securities |
15,217 |
27,720 |
5,226 |
2,796 |
|
Asset-backed securities |
629 |
33,794 |
1,381 |
2,311 |
|
Mortgage-backed securities |
8,761 |
134,031 |
5,754 |
1,928 |
|
Total fixed maturities |
$92,206 |
$197,539 |
$33,013 |
$12,780 |
Fixed maturities at 31 December 2008, 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 |
Amortised cost |
|
Due in one year or less |
$159,809 |
$162,325 |
|
Due after one through five years |
1,336,298 |
1,298,917 |
|
Due after five years through ten years |
274,507 |
260,458 |
|
Due after ten years |
60,340 |
56,152 |
|
|
1,830,954 |
1,777,852 |
|
Asset-backed securities |
256,702 |
289,867 |
|
Mortgage-backed securities |
620,565 |
745,835 |
|
Total |
$2,708,221 |
$2,813,554 |
The Group did not have an aggregate investment with a single counterparty, other than the US government securities, in excess of 10 per cent of total investments at 31 December 2008 and 2007.
Investments in funds
The Group has classified its investments in funds as trading securities and, accordingly, all realised and unrealised gains and losses on these investments are recorded in net income in the Consolidated Statements of Operations. The investments comprise investments in bond funds, equity funds, internal fund of funds, funds of funds and cash on deposit with fund managers. The internal fund of funds comprises 25 individual hedge funds across a diversified set of managers, strategies and underlying asset classes.
Values of investments in funds by category at 31 December 2008 and 2007 are as follows:
|
|
2008 |
2007 |
|
Equity funds |
$78,824 |
$112,293 |
|
Internal fund of funds |
432,578 |
541,621 |
|
Funds of funds |
158,385 |
162,510 |
|
Bond funds |
131,000 |
129,994 |
|
Total investments in funds |
$800,787 |
$946,418 |
Net investment income
The components of net investment income for the years ended 31 December 2008 and 2007 are as follows:
|
|
2008 |
2007 |
|
Interest income |
$234,050 |
$262,614 |
|
Investment in associate |
5,203 |
983 |
|
Investment expenses |
(6,308) |
(3,308) |
|
Net investment income |
$232,945 |
$260,289 |
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 or guarantees for Letters of Credit ('LOC'), as described in Note 10. Finally, the Group also utilises trust funds set up for the benefit of the ceding companies, and generally in place of LOC requirements.
The total value of these restricted assets by category at 31 December 2008 and 2007 is as follows:
|
|
2008 |
2007 |
|
Fixed maturities |
$1,565,661 |
$1,422,521 |
|
Short-term investments |
5,000 |
22,881 |
|
Cash and cash equivalents |
350,100 |
558,868 |
|
Total restricted assets |
$1,920,761 |
$2,004,270 |
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 $32,350 (2007: $43,917) of securities on loan at 31 December 2008.
5 Fair value measurement
FAS 157 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. FAS 157 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 FAS 157 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 investments in equity funds.
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 government and agency securities; non-US government obligations, corporate and municipal bonds, mortgage-backed securities ('MBS') 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 currency options and forward contracts); and hedge fund investments 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 assumptions about assumptions that market participants might use.
Assets and liabilities utilising Level 3 inputs include: insurance and reinsurance derivative contracts; hedge funds with significant redemption restrictions; sub-prime and Alt-A securities 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 2008 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.
|
|
Balance as at 31 December 2008 |
Level 1 inputs |
Level 2 inputs |
Level 3 inputs |
|
Assets |
|
|
|
|
|
Fixed maturities |
$2,708,221 |
$- |
$2,671,132 |
$37,089 |
|
Short-term investments |
68,982 |
- |
68,982 |
- |
|
Investments in funds |
800,787 |
158,385 |
308,872 |
333,530 |
|
Derivative assets |
6,602 |
- |
- |
6,602 |
|
Total assets at fair value |
$3,584,592 |
$158,385 |
$3,048,986 |
$377,221 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Derivative liabilities |
$17,163 |
$- |
$17,163 |
$- |
The changes in the period in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:
|
|
Fixed maturities |
Investments in funds |
Derivative (liabilities)/assets |
|
Balance, 1 January 2008 |
$82,370 |
$241,121 |
$(9,099) |
|
Total net (losses) gains included in income |
(24,304) |
(91,211) |
15,701 |
|
Net (disposals) purchases |
(20,977) |
34,000 |
- |
|
Level 3 transfers in |
- |
152,441 |
- |
|
Foreign exchange |
- |
(2,821) |
- |
|
Balance, 31 December 2008 |
$37,089 |
$333,530 |
$6,602 |
|
|
|
|
|
|
Amount of net (losses) gains relating to balances still held at the year end |
$(24,824) |
$(91,211) |
$15,701 |
Gains and losses on fixed maturities are recorded in the statement of operations. Gains and losses on derivative instruments are recorded in change in fair value of derivatives.
Fair value option
The Group has elected to adopt the FAS 159 fair value option to its fixed maturities and short-term investments. Losses of $111,488 in relation to changes in the fair values of these assets have been included in the 2008 Consolidated Statement of Operations
6 Investment in associate
On 2 September 2008, the Group, through Catlin Inc., one its US subsidiaries, sold its 25 per cent membership interest in Southern Risk Operations, L.L.C. ('SRO') which was accounted for using the equity method. The Group received cash distributions from SRO during the year ended 31 December 2008 of $1,240 (2007: $1,064). The share of SRO's profit included within the Consolidated Statement of Operations during 2008 was $560 (2007: $983). The Group's share of the gain on sale was $4,643 and its share of the proceeds was $6,500. Under the terms of the sale, the Group may be entitled to further contingent consideration dependent on further thresholds being met in the next five years.
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 2008 and 2007.
The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2008 and 2007 is as follows:
|
|
2008 |
2007 |
|
Gross unpaid losses and loss expenses, beginning of year |
$4,237,525 |
$4,005,133 |
|
Reinsurance recoverable on unpaid loss and loss expenses |
(860,181) |
(996,896) |
|
Net unpaid losses and loss expenses, beginning of year |
3,377,344 |
3,008,237 |
|
Net incurred losses and loss expenses for claims related to: |
|
|
|
Current year |
1,750,110 |
1,293,914 |
|
Prior years |
(118,273) |
(139,244) |
|
Total net incurred losses and loss expenses |
1,631,837 |
1,154,670 |
|
Net paid losses and loss expenses for claims related to: |
|
|
|
Current year |
60,337 |
(105,218) |
|
Prior years |
(1,211,494) |
(832,278) |
|
Total net paid losses and loss expenses |
(1,151,157) |
(937,496) |
|
Foreign exchange and other |
(326,191) |
50,930 |
|
Loss portfolio transfer |
4,384 |
101,003 |
|
Net unpaid losses and loss expenses, end of year |
3,536,217 |
3,377,344 |
|
Reinsurance recoverable on unpaid losses and loss expenses |
1,070,039 |
860,181 |
|
Gross unpaid losses and loss expenses, end of year |
$4,606,256 |
$4,237,525 |
As a result of the changes in estimates of insured events in prior years, the 2008 reserves for losses and loss expenses net of reinsurance recoveries decreased by $118,273 (2007: $139,244). The decrease in reserves relating to prior years was due to reductions in expected ultimate loss costs and reductions in uncertainty surrounding the quantification of the net cost claim events.
2008 hurricanes
The table below shows the Group's estimated ultimate loss relating to Hurricanes Ike and Gustav as at 31 December 2008.
|
|
2008 |
|
Gross loss |
$334,706 |
|
Reinsurance recoveries |
(61,317) |
|
Net loss prior to reinstatement premiums |
273,389 |
|
Net reinstatement premiums |
(24,380) |
|
Net loss |
$249,009 |
The figures above represent management's best estimate of the likely final losses to the Group from the 2008 hurricanes. In making this estimate, management has used the best information available, including estimates performed by the Group's underwriters, actuarial and claims staff, retained external actuaries, outside agencies and market studies. Allowance is made in the overall management best estimate of net unpaid losses for an appropriate level of sensitivity, for both individual large losses and the overall portfolio of business. In respect of the 2008 hurricanes, management have particularly considered sensitivities relating to gross losses on direct and reinsurance accounts, underlying loss experience of cedants and reinsurance coverage and security issues.
Loss portfolio transfer
In 2008, Syndicate 2020 closed the 2005 Lloyd's underwriting year of account by way of a Lloyd's reinsurance to close. In closing the 2005 year of account, all outstanding losses were transferred into the 2006 year of account. The Group had an additional ownership of approximately 0.59 per cent acquired from the external Names in respect of the 2006 year of account, which resulted in an increase in loss reserves of $4,384; this has been treated as a loss portfolio transfer. In 2007, the 2004 Lloyd's underwriting year of account was closed, resulting in an increase in loss reserves of $101,003. To the extent that the future run-off of the 2005 and 2004 year of account differs from what has been recorded, that development will be recorded in the Consolidated Statement of Operations in the period that it is incurred.
8 Reinsurance
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. The effect of reinsurance and retrocessional activity on premiums written and earned is as follows:
|
|
|
2008 |
|
2007 |
|
|
Premiums written |
Premiums earned |
Premiums written |
Premiums earned |
|
Direct |
$2,466,600 |
$2,372,052 |
$2,505,216 |
$2,355,056 |
|
Assumed |
970,404 |
936,351 |
855,410 |
804,110 |
|
Ceded |
(825,561) |
(712,362) |
(787,108) |
(669,632) |
|
Net premiums |
$2,611,443 |
$2,596,041 |
$2,573,518 |
$2,489,534 |
On 21 February 2008, the Group entered into a reinsurance contract with Newton Re Limited ('Newton Re') for $150,000 of annual aggregate protection against accumulated losses from US windstorm, US earthquake, European windstorm, Japanese typhoon and Japanese earthquake events in the Group's property treaty book. The transaction provides coverage on a first-event and accumulated aggregate retrocession protection on a collateralised basis. No claims have arisen to date.
The collateral value (and interest payable under associated notes issued by Newton Re to investors not affiliated with the Group) were supported by a total return swap. The bankruptcy of the total return swap counterparty, Lehman Brothers Inc, on 15 September 2008 resulted in the termination of the total return swap. The total return swap has not been replaced and, as at 31 December 2008, the collateral value is less than the full indemnity limit of $150,000. Given the likelihood of claims at that level and the current value of the collateral, the Group's incremental exposure is not considered to be material.
The Group's provision for reinsurance recoverable as at 31 December 2008 and 2007 is as follows:
|
|
2008 |
2007 |
|
Gross reinsurance recoverable |
$1,259,927 |
$1,046,241 |
|
Provision for uncollectible balances |
(34,296) |
(33,460) |
|
Net reinsurance recoverable |
$1,225,631 |
$1,012,781 |
The Group evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All current reinsurers 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. However, certain reinsurers from prior years have experienced a reduced ratings which has led to the need for the provision. At 31 December 2008, there were three reinsurers which accounted for 5 per cent or more of the total reinsurance recoverable balance.
|
|
% of reinsurance recoverable |
Best rating |
|
Munich Re |
12% |
A+ |
|
Hannover Ruck-AG |
8% |
A |
|
Swiss Re |
7% |
A+ |
9 Derivative financial instruments
Catastrophe swap agreements
Newton Re
On 17 December 2007, Catlin Bermuda entered into a contract that provides up to $225,000 in coverage in the event of one or more natural catastrophes. Catlin Bermuda's counterparty in the catastrophe swap ('cat swap') is a special purpose vehicle, Newton Re. Newton Re has issued to investors $225,000 in three-year floating rate notes, divided into Class A and Class B notes. The proceeds of those notes provide the collateral for Newton Re's potential obligations to Catlin Bermuda under the cat swap.
The Newton Re cat swap responds to certain covered risk events occurring during a three-year period. The categories of risk events covered by the transaction are US hurricanes and US earthquakes. Newton Re will pay a maximum of $137,500 for US hurricane events and $87,500 for US earthquake events.
The Newton Re cat swap will be triggered for risk events if aggregate insurance industry losses, as estimated by Property Claims Services ('PCS'), meet or exceed defined threshold amounts.
The cat swap has not been triggered as at 31 December 2008.
Bay Haven
On 17 November 2006, Catlin Bermuda entered into a cat swap that provides up to $200,250 in coverage in the event of a series of natural catastrophes. Catlin Bermuda's counterparty in the cat swap is a special purpose vehicle, Bay Haven Limited ('Bay Haven'). Bay Haven has issued to investors $200,250 in three-year floating rate notes, divided into Class A and Class B notes. The proceeds of those notes provide the collateral for Bay Haven's potential obligations to Catlin Bermuda under the cat swap.
The Bay Haven cat swap responds to certain covered risk events occurring during a three-year period. No payment will be made for the first three such risk events. Bay Haven will pay Catlin Bermuda $33,375 per covered risk event thereafter, up to a maximum of six events. The aggregate limit potentially payable to Catlin Bermuda is $200,250.
The categories of risk events covered by the Bay Haven cat swap are: US hurricanes, California earthquakes, US Midwest earthquakes, UK windstorms, European (excluding UK) windstorms, Japanese typhoons and Japanese earthquakes. Only one payment will be made for each covered risk event, but the cat swap will respond to multiple occurrences of a given category of risk event, such as if more than one qualifying US hurricane occurs during the period.
The Bay Haven cat swap will be triggered for US risk events if aggregate insurance industry losses, as estimated by PCS, meet or exceed defined threshold amounts. Coverage for non-US risk events will be triggered if specific parametric criteria, such as wind speeds or ground motions, are met or exceeded. The first two events paid under the cat swap would impact the Class B notes; subsequent events, up to the limit of six events over the three-year period, would impact the Class A notes.
In addition, on 17 November 2006 Catlin Bermuda entered into a further cat swap agreement with Royal Bank of Scotland (formerly ABN AMRO Bank N.V. London Branch) which will respond to the third covered risk event (that is, the covered risk event before the Class B notes are triggered). The terms are otherwise as described for the Class A and Class B notes, except that the limit payable is $56,500.
Values of Catastrophe Swap Agreements
The Newton Re and Bay Haven cat swaps fall within the scope of FAS 133 and are therefore measured in the balance sheet at fair value with any changes in the fair value included in the change in fair value of derivatives in the Statements of Operations. As at 31 December 2008, the fair value of the cat swaps is an asset of $6,602 (2007: a liability of $9,099). Because there is no liquid market in these derivatives, the fair values are determined by management based on the valuation of the notes issued by Newton Re and Bay Haven. The fair value of the Newton Re cat swap is derived from indicative prices for the Class A and Class B notes issued by Newton Re. The fair value of the Bay Haven cat swap is determined using an internal model that takes into account changes in the market for catastrophe reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date.
Other derivative instruments
On acquisition of Wellington, the Group acquired various foreign currency derivatives (forward contracts, caps and collars) and options to purchase shares in Aspen Insurance Group ('Aspen'). As at 31 December 2008, the fair value of the foreign currency derivatives was a liability of $17,163 (2007: asset of $9,035), of which $17,163 (2007: $6,139) had a remaining term of less than 12 months.
In March 2007, the Group exercised the share options it held with respect to Aspen. Following the exercise of the options to purchase 3,781,120 shares on a cash-less basis at an exercise price of $22.52 and a share price of $25.38, Catlin received 426,083 shares. The sale of the shares began 30 March and was completed on 12 April 2007. The resulting sale resulted in a capital loss of $6,354 recorded in change in fair value of derivatives.
10 Subordinated debt and financing arrangements
The Group's outstanding subordinated debt as at 31 December 2008 and 2007 consisted of the following:
|
|
2008 |
2007 |
|
Variable rate, face amount €7,000, due 15 March 2035 |
$10,247 |
$10,873 |
|
Variable rate, face amount $27,000, due 15 March 2036 |
28,264 |
28,831 |
|
Variable rate, face amount $31,300, due 15 September 2036 |
32,879 |
33,480 |
|
Variable rate, face amount $9,800, due 15 September 2036 |
10,287 |
10,482 |
|
Variable rate, face amount €11,000, due 15 September 2036 |
16,204 |
17,159 |
|
Total subordinated debt |
$97,881 |
$100,825 |
Subordinated debt
On 12 May 2006 Catlin Underwriting (formerly 'Wellington Underwriting plc') issued $27,000 and €7,000 of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all Senior Creditors, as defined in the agreement. The notes pay interest based on the rate on three-month deposits in US Dollars plus a margin of 317 basis points for the Dollar note and 295 basis points for the Euro note. Interest is payable quarterly in arrears. The notes are 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 $31,300, $9,800 and €11,000 of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all Senior Creditors, as defined in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 310 basis points for the $31,300 notes and 300 basis points for the other two notes. Interest is payable quarterly in arrears. The notes are each redeemable at the discretion of the issuer on 15 September 2011.
Bank facilities
Since November 2003, the Group has participated in a Letter of Credit/Revolving Loan Facility (the 'Club Facility'). The Club Facility has been varied, amended and restated since it was originally entered into, most recently on 10 September 2008, when the credit available under the Club Facility increased from $400,000 and £275,000 to $600,000 and £320,000, respectively. The facility initially included three banks; on 15 December 2006 it increased to four banks and on 25 January 2007 it expanded to seven banks. The Club Facility is composed of three tranches as detailed below. The following amounts were outstanding under the Club Facility as at 31 December 2008:
-
A 364-day $100,000 revolving facility with a one-year term-out option ('Facility A') is available for utilisation by the Group. Facility A, while not directly collateralised, is secured by floating charges on Group assets and cross-guarantees from material subsidiaries (together with Facilities B and C). Facility A has not been drawn down.
-
Clean, irrevocable standby LOCs of $467,200 (£320,000) are available to support the Catlin Syndicate's underwriting at Lloyd's ('Facility B'). As at 31 December 2008, the Catlin Corporate Names and Syndicate have utilised Facility B and deposited with Lloyd's 13 LOCs which total the amount of $386,900 (£265,000). In the event that the Catlin Syndicate fails to meet its obligations under policies of insurance written on its behalf, Lloyd's could draw down this letter of credit. These LOCs have an initial expiry date of 27 November 2012.
-
A two-year $500,000 standby LOC facility is available for utilisation by Catlin Bermuda and Catlin UK ('Facility C'). It is further split into two equal tranches of $250,000 with the first being fully secured by OECD Government Bonds, US Agencies, Corporate and Asset Backed securities and or cash discounted at varying rates. The second tranche is unsecured. At 31 December 2008, $231,783 in LOCs were outstanding, of which $228,352 were issued for the benefit of insureds and re-insureds of Catlin Bermuda, and $3,431 (£1,675) issued for the benefit of an insured of Catlin UK. $120,652 of the LOCs were issued on an unsecured basis. Facility C has an expiry date of 31 December 2010.
The terms of the Club Facility require that certain financial covenants be met on a quarterly basis through the filing of Compliance Certificates. These include maximum levels of possible exposures to realistic disaster scenarios for the Group, as well as requirements to maintain minimum tangible net worth. The Group was in compliance with all covenants during 2008.
A second LOC Facility administered by Citibank on behalf of Lloyd's acting for the Lloyd's Syndicates had LOCs totalling $6,954 outstanding at 31 December 2008. These LOCs are fully secured.
Catlin US issued LOCs to state regulators and other parties. These LOCs amount to $5,912 and are secured.
11 Intangible assets and goodwill
The Group's intangibles relate to the purchase of syndicate capacity, customer relationships, distribution channels and US insurance licenses (as admitted and eligible surplus lines insurers).
Net intangible assets and goodwill as at 31 December 2008 and 2007 consist of the following:
|
|
Goodwill |
Indefinite life intangibles |
Finite life intangibles |
Total |
|
Net value at 1 January 2007 |
$86,235 |
$770,495 |
$11,296 |
$868,026 |
|
Movements during 2007: |
|
|
|
|
|
Amendments to purchase price allocation |
5,542 |
- |
- |
5,542 |
|
Foreign exchange revaluation |
1,274 |
11,721 |
80 |
13,075 |
|
Amortisation charge |
- |
- |
(2,215) |
(2,215) |
|
Total movements during 2007 |
6,816 |
11,721 |
(2,135) |
16,402 |
|
Net value at 31 December 2007 |
93,051 |
782,216 |
9,161 |
884,428 |
|
Movements during 2008: |
|
|
|
|
|
Foreign exchange revaluation |
(23,078) |
(207,437) |
(921) |
(231,436) |
|
Amortisation charge |
- |
- |
(2,244) |
(2,244) |
|
Total movements during 2008 |
(23,078) |
(207,437) |
(3,165) |
(233,680) |
|
Net value at 31 December 2008 |
$69,973 |
$574,779 |
$5,996 |
$650,748 |
Goodwill, purchased syndicate capacity and admitted licenses are considered to have an indefinite life and as such are subject to annual impairment testing. Neither goodwill nor intangibles were impaired in 2008 or 2007.
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 2008, the gross carrying amount of finite life intangibles was $10,015 (2007: $11,456) and accumulated amortisation was $4,019 (2007: $2,295). Amortisation of intangible assets at current exchange rates will amount to approximately $2,015 per annum for the next three years and nil thereafter.
Changes in 2007 to the purchase price allocation in relation to the Wellington acquisition in 2006 resulted in an increase in related goodwill from $68,970 to $74,512. This increase was primarily due to additional acquisition expenses of $1,366 and an increase of $2,664 in the liability for restructuring costs.
Syndicate capacity
The syndicate capacity comprises underwriting capacity that the Group purchased in connection with the acquisition of Wellington in December 2006 and the cessation of Syndicate 2020 and amounts purchased by Catlin in 2002.
Syndicate capacity is tested annually for impairment by comparing management's estimate of its fair value to the amount at which it is carried in the Group's balance sheet.
The fair value of the Group's syndicate capacity is assessed by reference to market activity and internally developed cash flow models. In 2008 and 2007, management determined that the fair value of syndicate capacity exceeded its carrying value and no impairment has been recorded.
Effective 1 January 2007, Syndicate 2020 ceased underwriting and the purchased capacity (and that falling to the Group by way of cessation of Syndicate 2020) has been re-deployed to increase the capacity of Syndicate 2003.
12 Taxation
Bermuda
Under current Bermuda law neither the Company nor its Bermuda subsidiary, Catlin Bermuda, is required to pay any taxes in Bermuda on their income or capital gains. Both the Company and Catlin Bermuda 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 2016.
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.
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 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 also operates in the United States through its subsidiaries and their income is subject to both US state and federal income taxes.
Other international income taxes
The Group has a network of international operations and they also are 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(benefit)/expense for the years ended 31 December 2008 and 2007 is as follows:
|
|
2008 |
2007 |
|
Current tax benefit |
$(40,780) |
$- |
|
Deferred tax expense |
31,141 |
59,790 |
|
(Benefit)/expense for income taxes |
$(9,639) |
$59,790 |
The weighted average expected tax (benefit)/expense has been calculated using pre-tax accounting income/(loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. The weighted average tax rate for the Group is 76.9 per cent (2007: 11.0 per cent). A reconciliation of the difference between the (benefit)/expense for income taxes and the expected tax (benefit)/expense at the weighted average tax rate for the years ended 31 December 2008 and 2007 is provided below.
|
|
2008 |
2007 |
|
Expected tax (benefit)/expense at weighted average rate |
$(26,122) |
$98,206 |
|
Permanent differences: |
|
|
|
Disallowed expenses |
2,479 |
1,938 |
|
Valuation allowances |
11,032 |
- |
|
Prior year adjustments including changes in uncertain tax positions |
2,972 |
(23,385) |
|
Impact of tax rate changes |
- |
(16,969) |
|
(Benefit)/expense for income taxes |
$(9,639) |
$59,790 |
The components of the Group's net deferred tax liability as at 31 December 2008 and 2007 are as follows:
|
|
2008 |
2007 |
|
Deferred tax assets: |
|
|
|
Net operating loss carryforwards |
$65,122 |
$56,911 |
|
Stock options |
4,184 |
7,839 |
|
Deep discount security unwind |
- |
1,146 |
|
Accelerated capital allowances |
2,557 |
1,989 |
|
Compensation accruals |
382 |
12,329 |
|
Syndicate capacity amortisation and other |
1,450 |
3,093 |
|
Valuation allowance |
(20,249) |
(9,217) |
|
Total deferred tax assets |
$53,446 |
$74,090 |
|
Deferred tax liabilities: |
|
|
|
Untaxed profits |
(142,562) |
(179,784) |
|
Intangible assets arising on business combination |
(87,210) |
(119,148) |
|
Total deferred tax liabilities |
$(229,772) |
$(298,932) |
|
Net deferred tax liability |
$(176,326) |
$(224,842) |
As at 31 December 2008, there are potential deferred tax assets of $20,249 (2007: $9,217) in the US companies relating to 2008 calendar year losses but a 100 per cent valuation allowance has been recognised in respect of the losses in both 2008 and 2007.
As at 31 December 2008, the Group has net operating loss carry forwards of $161,984 (2007: $170,336) which are available to offset future taxable income. The net operating loss carry forwards primarily arise in the UK subsidiaries where they are expected to be fully used. There are no time restrictions on the use of these losses.
Uncertain tax benefits
With effect from 1 January 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainly in Income Taxes - an Interpretation of Statement of Financial Accounting Standard No. 109 ('FIN 48'). On adoption of FIN 48, the total amount of the Group's unrecognised tax benefits arising from uncertain tax positions was $11,201. As at 31 December 2008, this amount was $7,800 (2007:$9,300). 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:
|
|
2008 |
2007 |
|
Unrecognised tax benefits balance at 1 January |
$9,300 |
$- |
|
Gross increases for tax positions in current year |
- |
11,201 |
|
Gross increases for tax positions of prior years |
- |
7,031 |
|
Gross decreases for tax positions of prior years |
(1,500) |
(8,932) |
|
Unrecognised tax benefits balance at 31 December |
$7,800 |
$9,300 |
The Group does not believe it would 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 2008 or 2007 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 |
2006-2008 |
|
United States |
2006-2008 |
13 Stockholders' equity
The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2008 and 2007:
|
|
2008 |
2007 |
|
Common stock, par value $0.01 |
|
|
|
Authorised |
400,000,000 |
400,000,000 |
|
|
|
|
|
Issued |
255,162,926 |
253,122,072 |
|
Shares in Employee Benefit Trust |
(6,725,149) |
(639,486) |
|
Outstanding |
248,437,777 |
252,482,586 |
|
|
|
|
|
Preferred shares, par value $0.01 |
|
|
|
Authorised, issued and outstanding |
600,000 |
600,000 |
The following table outlines the changes in common stock issued during 2008 and 2007:
|
|
2008 |
2007 |
|
Balance, 1 January |
253,122,072 |
238,283,281 |
|
Exercise of stock options and warrants |
2,040,854 |
3,159,154 |
|
Business combination |
- |
11,679,637 |
|
Balance, 31 December |
255,162,926 |
253,122,072 |
Business combination
In 2007, 11,679,637 shares were issued in connection with the acquisition of Wellington in 2006.
Preferred shares
On 18 January 2007, Catlin Bermuda issued 600,000 of non-cumulative perpetual preferred shares, par value of $0.01 per share, with liquidation preference of $1,000 per share, plus declared and unpaid dividends. Dividends are payable semi-annually in arrears only if, as and when declared by the Board of Directors, on 19 January and 19 July, commencing on 19 July 2007, at a rate of 7.249 per cent on the liquidation preference, up to but not including 19 January 2017. Thereafter, if the shares have 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 $589,785, net of issuance costs, which were used to repay a $500,000 bridge facility as well as Facility A described in Note 10, and for general corporate purposes. The preference 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.
Treasury stock
In connection with the Performance Share Plan ('PSP'), at each dividend date, an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting) is paid into an Employee Benefit Trust ('EBT'). The EBT uses these funds to purchase Group common stock in the open market. These shares will ultimately be distributed to PSP holders to the extent that the PSP awards vest. In 2008 the Group also purchased shares that will be used to satisfy the 2008 PSP awards if and when they vest and become exercisable from March 2011 onwards. During 2008, the Group, through the EBT, purchased 6,184,556 of common stock at an average of $8.10 (£4.08) per share. The total cumulative amount of treasury stock of $55,186 measured at cost and is shown as a deduction to stockholders' equity.
In conjunction with the Wellington acquisition, the Group agreed to compensate legacy Wellington employees that held units in the Wellington EBT. There were no costs associated with the distribution of these shares during 2008 or 2007.
Warrants
In 2002, the Company issued 20,064,516 warrants to stockholders to purchase common stock. Warrants may be exercised in whole or in part, at any time, until 4 July 2012 and are exercisable at a price share of $5.00. During 2008, 2,942,796 warrants to purchase common stock were exercised and settled net for 1,060,547 shares of common stock. In prior periods, 11,083,834 warrants were exercised, leaving 6,037,886 warrants outstanding at 31 December 2008.
Dividends
Dividends on common stock
On 23 May 2008, the Group paid a final dividend on the common stock relating to the 2007 financial year of $0.338 (£0.17) per share to stockholders of record at the close of business on 25 April 2008. The total dividend paid for the 2007 financial year was $0.502 (£0.251) per share.
On 7 November 2008, the Group paid an interim dividend relating to the 2008 financial year of $0.168 per share (£0.086 per share) to stockholders of record as at 12 October 2008.
Dividends on preferred shares
On 19 January and 19 July 2008, the Board of Catlin Bermuda paid a dividend of $21,750 to the stockholders of the non-cumulative perpetual preferred shares.
14 Employee stock compensation schemes
The Group has two stock compensation schemes in place under which awards are outstanding: the Performance Share Plan ('PSP'), adopted in 2004, and a Long Term Incentive Plan ('LTIP'), adopted in 2002. The Group also has two Employee Share Plans in place, both of which were adopted in 2008. 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 credited to income in respect of the plans in the year ended 31 December 2008 was $1,777 (2007: expense of $13,668) included in administrative and other expenses. Remaining stock compensation to be expensed in future periods relating to these plans is $3,136. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions. During 2008, performance against these conditions has been adversely affected, primarily by the decrease in reported net assets. Expected total compensation relating to PSP awards part of which was expensed in previous periods, has therefore reduced, which has resulted in a credit to income in the year.
Performance Share Plan
On 6 March 2008, a total of 3,944,268 options with $nil exercise price and 1,129,047 non-vested shares (total of 5,073,315 securities) were awarded to Group employees under the PSP. On 6 August 2008, a further 109,766 options with $nil exercise price and 49,816 non-vested shares (total of 159,582 securities) were awarded, resulting in a total of 5,232,897 securities granted to Group employees under the PSP in 2008. Up to half of the securities will vest in 2011 and up to half will vest in 2012, 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 5 per cent for grants made in 2008, 7 per cent for grants made in 2007, 4 per cent for grants made in 2006 and 3 per cent for grants made in 2005. 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 income statement, with a corresponding adjustment to equity. The total number of PSP securities outstanding at 31 December 2008 was 11,473,623 (2007: 7,732,772) and the total amount credited to income relating to the PSP for the year ended 31 December 2008 was $1,777 (2007: expense of $13,313).
The weighted average grant date fair value of the options awarded in 2008 is $8.74 and the total fair value of shares vested during the year is $8,999 (2007:$nil).
The table below shows the PSP securities as at 31 December 2008:
|
|
Outstanding |
Non-vested |
Vested |
|
Beginning of year |
7,732,772 |
7,732,772 |
- |
|
Granted during year |
5,232,897 |
5,232,897 |
- |
|
Vested during the year |
- |
(1,023,771) |
1,023,771 |
|
Forfeited during year |
(703,745) |
(703,745) |
- |
|
Exercised during the year |
(788,301) |
- |
(788,301) |
|
End of year |
11,473,623 |
11,238,153 |
235,470 |
|
Exercisable, end of year |
235,470 |
- |
235,470 |
In addition, at each dividend payment date, an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting), is paid into an Employee Benefit Trust. This amount, totalling $3,553 in 2008, is treated as a deferred compensation obligation and as such is taken directly to retained earnings and capitalised in stockholders' equity within additional paid-in capital.
Employee Share Plans
The UK Savings-Related Share Option Scheme ('SharesaveUK' or 'plan') was approved by the stockholders of the Group on 14 May 2008. The plan is administered by an external party. Employees in the UK that met minimum employment criteria of the designated participating subsidiaries are eligible for participation in the plan. Eligible employees can elect to invest up to a maximum of £0.25 per month for the full three-year period of the plan. Employees who participate in the SharesaveUK can, at the end of the plan period, purchase the Group's shares at a 20 per cent discount on the market price at the grant date of the award. At 31 December 2008, a total of 551,742 shares have been awarded at an option price of £3.18 per share ($6.30 per share).
The US Employee Stock Purchase Plan ('ESPP' or 'plan') was also approved by the stockholders of the Group on 14 May 2008 and is administered by an external party. Employees in the US that met minimum employment criteria of the designated participating subsidiaries were eligible for participation in the plan. Eligible employees could contribute up to 15 per cent of their base salary, subject to a maximum of $21.25, during the approximately 12-month offering period towards the purchase of the Group's shares, up to a total fair market value of $25 in each plan year. For the 2008-2009 plan year, employees who participate in the ESPP could purchase the Group's shares at a 15 percent discount on the fair market price at the grant date. At 31 December 2008, employees enrolled to purchase a total of 70,103 shares for the 2008-2009 plan year at a share price of $7.05 per share (£3.58 per share).
The expense related to the Employee Share Plans is considered to be insignificant.
Long Term Incentive Plan
Interests in a total of 16,791,592 ordinary common shares were granted to eligible employees in 2004 and prior years. The LTIP options were fully exercised and expensed by 31 December 2007. There was no compensation expense in relation to the LTIP for the year ended 31 December 2008 (2007: $359).
The options are fully vested as at 31 December 2008 and all options will expire by 4 July 2012. The table below shows the vesting dates and the number of options that have vested on those dates:
|
Date |
Number of options vesting |
|
4 July 2003 |
1,576,110 |
|
6 April 2004 (IPO date) |
4,815,484 |
|
4 July 2004 |
1,668,261 |
|
4 July 2005 |
1,655,158 |
|
4 July 2006 |
1,647,564 |
|
4 July 2007 |
5,429,015 |
|
Total |
16,791,592 |
The table below shows the status of the interests in shares as at 31 December 2008 and 2007:
|
|
|
2008 |
|
2007 |
|
|
Number |
Weighted average exercise price ($) |
Number |
Weighted average exercise price ($) |
|
Outstanding, beginning of year |
5,144,109 |
4.94 |
15,270,679 |
9.76 |
|
Exercised during year |
(510,734) |
4.94 |
(501,044) |
5.92 |
|
Forfeited during year |
- |
- |
(130,168) |
12.32 |
|
Expired during year |
- |
- |
(9,495,358) |
12.53 |
|
Outstanding, end of year |
4,633,375 |
4.94 |
5,144,109 |
4.94 |
|
Exercisable, end of year |
4,633,375 |
4.94 |
5,144,109 |
4.94 |
|
Exercise price |
Number of |
Average remaining |
|
|
Options |
contractual life |
|
|
outstanding |
(years) |
|
$5.00 |
4,454,882 |
3.5 |
|
£3.50 |
178,493 |
3.5 |
|
Total |
4,633,375 |
3.5 |
As at year end, there was no amount receivable from stockholders on the exercise of interests in shares.
The fair value of the options granted during 2004 was calculated using the Black-Scholes valuation model and is amortised over the expected vesting period of the options, being four years for the £3.50 tranche, 1.875 for the performance-based tranche that vested on admission and 3.625 for the performance-based tranche that vested on 4 July 2007. The valuation has assumed an average volatility of 40 per cent, no expected dividends and a risk-free rate using US dollar swap rates appropriate for the expected life assumptions: 2.8 per cent for four years; 1.79 per cent for 1.875 years; and 2.64 per cent for 3.625 years.
The fair value of the options granted prior to 2004 was calculated using the Black-Scholes valuation model and is being amortised over the expected vesting period of the options, being 4.0 years from the date of the subscription agreement. The valuation has assumed a risk free rate of return at the average of the four- and five-year US dollar swap rates of 3.39 per cent and no expected volatility (as the minimum value method was utilised because the Company was not listed on the date the options were issued).
15 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 in issue during the year.
Diluted earnings per share is calculated by dividing the earnings attributable to all common stockholders by the weighted average number of common shares in issue adjusted to assume conversion of all dilutive potential common shares. The company has the following potentially dilutive instruments outstanding during the periods presented:
(i) PSP;
(ii) LTIP;
(iii) Warrants; and
(iv) Employee share plans
(Loss)/income available to common stockholders is arrived after deducting preferred share dividends of $43,500 (2007: $21,868).
Reconciliations of the number of shares used in the calculations are set out below.
|
|
2008 |
2007 |
|
Weighted average number of shares |
249,839,605 |
250,311,588 |
|
Dilution effect of warrants |
- |
4,258,094 |
|
Dilution effect of stock options and non-vested shares |
- |
10,130,761 |
|
Dilution effect of stock options and warrants exercised in the year |
- |
927,684 |
|
Weighted average number of shares on a diluted basis |
249,839,605 |
265,628,127 |
|
|
|
|
|
(Loss)/earnings per common share |
|
|
|
Basic |
$(0.19) |
$1.84 |
|
Diluted |
$(0.19) |
$1.74 |
Potentially issuable securities that would result in a reduction in loss per share if issued are not considered to have a dilution effect. In 2008, due to the loss incurred, no potentially issuable securities are considered dilutive. As a result, there is no difference between basic and diluted amounts.
In 2007, all securities awarded under the PSP were included in the computation of diluted earnings per share because the performance conditions necessary for these securities to vest were met as at 31 December 2007. All options to purchase shares under the LTIP were included in the computation of diluted earnings per share.
16 Other comprehensive (loss)/income
The following table details the individual components of other comprehensive (loss)/income for 2008 and 2007:
|
2008 |
Amount before tax |
Tax benefit/ (expense) |
Amount after tax |
|
Cumulative effect of adoption of FAS 159 |
$(20,233) |
$5,809 |
$(14,424) |
|
Defined benefit pension plan |
1,121 |
(314) |
807 |
|
Cumulative translation adjustments |
(307,031) |
(18,824) |
(325,855) |
|
Change in accumulated other comprehensive loss |
$(326,143) |
$(13,329) |
$(339,472) |
|
2007 |
Amount before tax |
Tax benefit/ (expense) |
Amount after tax |
|
Unrealised losses arising during the year |
$(42,547) |
$6,450 |
$(36,097) |
|
Reclassification for losses realised in income |
78,970 |
(13,259) |
65,711 |
|
Net unrealised losses on investments |
36,423 |
(6,809) |
29,614 |
|
Defined benefit pension plan |
(818) |
264 |
(554) |
|
Cumulative translation adjustments |
42,097 |
(6,247) |
35,850 |
|
Change in accumulated other comprehensive income |
$77,702 |
$(12,792) |
$64,910 |
The following table details the components of accumulated other comprehensive (loss)/income as at 31 December:
|
|
2008 |
2007 |
|
Net unrealised gains (losses) on investments |
$- |
$14,424 |
|
Cumulative translation adjustments |
(300,905) |
24,950 |
|
Funded status of defined benefit pension plan adjustment |
253 |
(554) |
|
Accumulated other comprehensive (loss)/income |
$(300,652) |
$38,820 |
17 Pension commitments
The Group operates various pension schemes for the different countries of operation. In addition, the Group acquired a defined benefit pension plan and defined contribution plans as a part of the Wellington acquisition.
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 $8,664 for the year ended 31 December 2008 (2007: $8,035).
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 $662 for the year ended 31 December 2008 (2007: $733).
In the US, Catlin Inc. has adopted a 401(k) Profit Sharing Plan ('the Plan') qualified under the Internal Revenue Code in which all employees meeting specified minimum age and service requirements are eligible to participate. The Plan allows eligible participants to contribute a portion of their salary to the Plan on a tax-deferred basis. Catlin Inc. will match the employee contributions up to 100 per cent of the first 6 per cent of salary contributed. An additional discretionary contribution may be made to the plan as determined by the Board of Directors of Catlin Inc. on an annual basis and allocated on a pro rata basis to individual employees based on eligible compensation. The pension cost for the Plan for the year ended 31 December 2008 was $4,412. (2007: $2,875). In 2005, Catlin Inc. established a Non-Qualified Deferred Compensation Plan ('Non-Qualified Plan') under which higher-paid employees are eligible for supplemental retirement benefits in excess of statutory limitations on Plan contributions and benefits. The expense related to the Non-Qualified Plan in for the year ended 31 December 2008 was $1,636 (2007:$575).
Defined benefit pension scheme
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. The movements in the period are shown in the table below.
|
|
2008 |
2007 |
|
Projected benefit obligation, beginning of year |
$31,860 |
$32,720 |
|
Change in projected benefit obligation: |
|
|
|
Interest cost |
1,665 |
1,654 |
|
Actuarial gain |
(4,475) |
(1,074) |
|
Benefits paid |
(1,811) |
(1,948) |
|
Foreign exchange |
(7,511) |
508 |
|
Projected benefit obligation, end of year |
19,728 |
31,860 |
|
Fair value of plan assets, beginning of year |
32,781 |
34,429 |
|
Change in plan assets: |
|
|
|
Expected return on plan assets |
1,728 |
1,742 |
|
Actuarial loss |
(4,274) |
(1,970) |
|
Contributions by the company |
857 |
- |
|
Benefits paid |
(1,811) |
(1,938) |
|
Foreign exchange |
(7,993) |
518 |
|
Fair value of plan assets, end of year |
21,288 |
32,781 |
|
Reconciliation of funded status: |
|
|
|
Funded status |
1,560 |
921 |
|
Net pension asset recognised at year end |
$1,560 |
$921 |
The amounts recognised in net income were as follows:
|
|
2008 |
2007 |
|
Interest cost |
$1,665 |
$1,654 |
|
Expected return on plan assets |
(1,728) |
(1,742) |
|
Net credit recognised in net income |
$(63) |
$(88) |
The actuarial assumptions used to value the benefit obligation at 31 December were as follows:
|
|
2008 |
2007 |
|
Discount rate |
7.2% |
5.8% |
|
Price inflation |
2.6% |
3.4% |
|
Pension increases to pensions in payment |
3.0% |
3.0% |
The objectives in managing the scheme's investments are to ensure that sufficient assets are available to pay members' benefits as they arise, with due regard to minimum regulatory requirements and the employer's ability to meet contribution payments. It is believed that, in relation to membership consisting only of pensioners and deferred members, these objectives are best met by investment in fixed income securities. The investments are in a pooled, non-government bond fund which is diversified across a large number of securities in order to reduce specific risk.
As at 31 December 2008, 100 per cent of plan assets were held in debt securities. No plan assets are expected to be returned to the Group during 2009.
The overall expected return on assets is calculated as the weighted average of the expected returns on each individual asset class. The return on debt securities is the current market yield on debt securities. The expected return on other assets is derived from the prevailing interest rate set by the Bank of England as at the measurement date.
Estimated future benefit payments for the defined benefit pension plan, are as follows:
|
2009 |
$1,737 |
|
2010 |
$1,606 |
|
2011 |
$1,869 |
|
2012 |
$1,781 |
|
2013 |
$1,883 |
|
2014-2018 |
$11,023 |
Contributions of $657 are expected to be paid to the defined benefit plan in 2009.
18 Statutory financial data
The Group's subsidiaries' statutory capital and surplus was $2,370,569 at 31 December 2008 (2007: $3,283,887). The statutory capital and surplus of each of its principal operating subsidiaries is in excess of regulatory requirements.
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.
19 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 provides finance under its Club Facility to enable its subsidiaries to continue trading and to meet its liabilities as they fall due, as described in Note 10.
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 as at 31 December 2008 are as follows:
|
2009 |
$12,061 |
|
2010 |
$11,551 |
|
2011 |
$11,017 |
|
2012 |
$9,743 |
|
2013 and thereafter |
$32,550 |
|
Total |
$76,922 |
Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $13,685 (2007: $1,298).
20 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 was $397 (2007: $242).
During 2007, the Group entered into a lease agreement with The Whitfield Group Ltd., the president of which is related to a Director of Catlin Bermuda. The agreement expires on 30 June 2009. Total rent incurred during 2008 amounted to $162 (2007: $141).
All transactions with related parties were entered into on normal commercial terms.
21 Subsequent events
Proposed dividend
On 8 February 2009, the Board approved a proposed final dividend of $0.266 per share (£0.18 per share), payable on 15 May 2009 to stockholders of record at the close of business on 20 February 2009. The final dividend is determined in US dollars but partially payable in sterling based on the exchange rate of £1 = $1.48 on 6 February 2009.
Preferred share dividend
The Board of Catlin Bermuda approved a dividend of $21,750 to the shareholders of the non-cumulative perpetual preference shares. This dividend was paid on 19 January 2009.
Rights Issue
On 12 February 2009 the Group announced that it was proposing to raise approximately $288 million (£200 million), net of expenses, by way of a Rights Issue of new common shares at 295 cents (205 pence) per share on the basis of two new common shares for every five existing common shares.
On 11 February 2009, Catlin Underwriting Agencies Limited agreed that Syndicate 2020 would close its 2006 Lloyd's underwriting year of account by way of a Lloyd's reinsurance to close. Under the reinsurance to close, liability for Syndicate 2020's outstanding losses was assumed by Syndicate 2003 for the payment of a premium equal to loss reserves. As a result of the transaction, the Group (via Syndicate 2003) has assumed the 33 per cent of Syndicate 2020's outstanding losses previously attributable to third-party members of Syndicate 2020, in addition to the 67 per cent share already held by the Group.
This information is provided by RNS
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