Final Results

RNS Number : 6322Z

Catlin Group Limited

10 February 2014

 



CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2013

Strong Underwriting Performance Produces
Record Net Underwriting Contribution Of US$1 Billion

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 2013.

Highlights

·   27 per cent increase in profit before tax to US$432 million (2012: $339 million)

·   29 per cent increase in net income to common stockholders to US$392 million (2012: $305 million)

·   17.0 per cent return on net tangible assets (2012: 14.6 per cent); 13.4 per cent return on equity (2012: 11.3 per cent)

·   Record net underwriting contribution of US$1.0 billion (2012: US$788 million)

§ 48 per cent of net underwriting contribution produced by non-London underwriting hubs (2012: 33 per cent)

·   50.1 per cent attritional loss ratio (2012: 50.6 per cent)

·   85.6 per cent combined ratio (2012: 90.0 per cent)

·   7 per cent increase in gross premiums written to US$5.31 billion (2012: US$4.97 billion)

§ 16 per cent increase in gross premiums written for non-London hubs

§ 53 per cent of total GPW produced by non-London hubs (2012: 49 per cent)

·   Total investment return of 1.5 per cent (2012: 2.0 per cent)

·   5 per cent increase in annual dividend to 31.0 UK pence per share (49.8 US cents) (2012: 29.5 UK pence; 46.0 US cents)

US$m		2013	2012
Gross premiums written		$5,309	$4,972
Net premiums written		$4,052	$3,834
Net premiums earned		$3,948	$3,604
Net underwriting contribution1		$1,003	$788
Total investment return		$135	$173
Net income before income tax		$432	$339
Net income to common stockholders		$392	$305
Earnings per share (US dollars)		$1.11	$0.88
Total dividend per share (pence)		31.0p	29.5p
Total dividend per share (US cents)		49.8¢	46.0¢
Loss ratio		52.3%	56.0%
Expense ratio2		33.3%	34.0%
Combined ratio2		85.6%	90.0%
Total investment return		1.5%	2.0%
Return on net tangible assets3		17.0%	14.6%
Return on equity3		13.4%	11.3%
		31 Dec 2013	31 Dec 2012
Total assets		$14,594	$14,041
Investments and cash		$9,217	$8,774
Stockholders' equity		$3,783	$3,512
Unearned premiums		$2,728	$2,552
Net tangible assets per share (sterling)4		£4.32	£4.05
Net tangible assets per share (US dollars)4		$7.17	$6.56
Book value per share (sterling)4		£5.37	£5.14
Book value per share (US dollars)4		$8.92	$8.32

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

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

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

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

John Barton, Chairman of Catlin Group Limited, said:

"Catlin has produced strong financial results for 2013 as profit before tax increased by 27 per cent to US$432 million. The Group's underwriting operations performed well, with net underwriting contribution amounting to slightly more than US$1.00 billion, an all-time record. Net tangible assets per share increased during 2013 by 9 per cent to US$7.17, whilst book value per share rose by 7 per cent to US$8.92.

"Whilst it is now clear that market conditions are becoming increasingly competitive for many classes of business underwritten by Catlin, margins are still strong. I believe that Catlin has the strategy, the infrastructure and most importantly the people in place to continue to produce good results for shareholders."

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

"Catlin's net underwriting contribution exceeded US$1 billion for the first time in 2013 because of our steadfast focus on underwriting discipline and our investment in building underwriting hubs outside of the London market. 

"Our attritional loss ratio - which measures the quality of our underwriting before exceptional losses and reserve movements are considered - remained at a low level of 50.1 per cent.  At the same time, our non-London underwriting hubs produced net underwriting contribution of US$480 million, an 83 per cent increase. These hubs accounted for 48 per cent of the Group's net underwriting contribution, compared with 33 per cent in 2012.

"I believe there are still good opportunities for Catlin, even in a softening market. Our diversified portfolio - by region and by product - allows us to see business that many of our competitors do not have the opportunity to write. Using our tested technical skills, we can select the business that we believe is most profitable.  It also must be remembered that margins for most classes of business are still strong and that rates for some classes of business are still rising.

"Catlin continues to build a business for the future, and we look ahead with confidence."

- ends -

For more information contact:

Media Relations:
James Burcke, Head of Communications, London	Tel: Mobile: E-mail:	[phone] [phone] [e-mail]
Liz Morley, Maitland	Tel: E-mail:	[phone] [e-mail]
Investor Relations:
William Spurgin, Head of Investor Relations, London	Tel: Mobile: E-mail:	[phone] [phone] [e-mail]

Notes to editors:

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

2.       Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2013 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment performance commentary.

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

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

5.       Rate of exchange at 31 December 2013: £1= US$1.66 (2012: £1 = US$1.62); average rate for 2013: £1 = US$1.57 (2012: £1 = US$1.59).

6.       Earnings per share are based on weighted average shares in issue of 355 millionduring 2013. Book value per share is based on 358 million shares in issue at 31 December 2013.  Both calculations exclude Treasury Shares held in trust.

7.       Catlin has established operating hubs in London, Bermuda, the United States, the Asia-Pacific region, Europe and Canada. Through these hubs, Catlin works closely with policyholders and their brokers. The hubs also provide Catlin with product and geographic diversity. Altogether, Catlin operates more than 50 offices in 22 countries.

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

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

10.     Catlin is the title sponsor of the Catlin Seaview Survey, a major scientific expedition that is documenting the composition and health of coral reefs around the world. During 2012 the Survey investigated the Great Barrier Reef off Australia, whilst during 2013 it studied coral reefs near Bermuda and in the Caribbean.  The 2014 Survey will focus on the Coral Triangle in Asia. The impartial scientific data gathered by the Catlin Seaview Survey is intended to strengthen the understanding of how changes beneath the oceans' surface are impacting the rest of our planet. More information is available at www.catlinseaviewsurvey.com.

Chairman's Statement

I am pleased to report that Catlin has produced strong financial results for 2013 as profits before tax increased by 27 per cent to US$432 million.

The Group's underwriting operations performed well.  Net underwriting contribution amounted to slightly more than US$1.00 billion, an all-time record.

Whilst the Group incurred US$156 million in catastrophe losses during 2013, the loss ratio was 52.3 per cent, the lowest since 2007. The attritional loss ratio - which excludes catastrophe losses, large single-risk losses and reserve movements - remained low at 50.1 per cent, which demonstrates Catlin's underwriting discipline and superior risk selection.

Our underwriting hubs outside London continued to grow in terms of both premium volume and, more importantly, net underwriting contribution. These five hubs produced aggregate net underwriting contribution amounting to US$480 million, an 83 per cent increase. They accounted for 48 per cent of the Group's net underwriting contribution in 2013, compared with only 33 per cent a year earlier. We continue to see profitable growth opportunities outside of London, and our decade-long investment in a global infrastructure will allow us to pursue these opportunities as they arise.

Total investment return amounted to US$135 million or 1.5 per cent of invested assets, a decrease from US$173 million or 2.0 per cent in 2012.  This performance was better than we had anticipated in the light of the mark-to-market losses sustained in our fixed income portfolio due to rising interest rates during 2013.  We believe that our investment strategy, which focuses on capital preservation, is appropriate for an insurer/reinsurer such as Catlin.

The Group kept expenses under control during 2013 with the expense ratio holding steady at 33.3 per cent on a like-for-like basis. This performance was notwithstanding major investments made during 2013 to improve IT systems and back office efficiency as well as the ever-increasing cost of regulation, which amounted to US$31 million in 2013, a rise of 21 per cent compared with the prior year.

Shareholder value and dividend

Net tangible assets per share increased during 2013 by 9 per cent to US$7.17, whilst book value per share rose by 7 per cent to US$8.92.

The Board of Directors has declared a final dividend of 21.0 UK pence (34.3 US cents) per share, payable on 20 March 2014 to shareholders of record on 21 February 2014. Including the interim dividend of 10 pence per share (15.5 US cents), the total 2013 dividend of 31.0 pence per share (49.8 US cents) represents a 5 per cent increase compared with the 2012 dividend.

Including the final dividend to be paid in March, the annual dividend payable by Catlin in sterling terms has increased by 187 per cent since the Group's initial public offering in 2004. The Group has declared dividends amounting to US$1.2 billion during the past ten years.

Conclusion

Catlin is first and foremost an underwriting company. Our strong underwriting performance in 2013 demonstrates that the Group's basic strategy, which stresses underwriting discipline and geographic and product diversification, is fit for purpose. Whilst it is now clear that market conditions are becoming increasingly competitive for many classes of business underwritten by Catlin, margins are still strong. I believe that Catlin has the strategy, the infrastructure and most importantly the people in place to continue to produce good results for shareholders.

I would like to thank all the people who work at Catlin, particularly the management team led by Stephen Catlin, for their contributions during the year. Their hard work and loyalty are in large part responsible for the excellent underwriting results produced by the Group in 2013.

John Barton

Chairman

7 February 2014

Chief Executive's Review

Catlin's excellent underwriting and profit performance in 2013 is a direct result of the operating strategy that the Group put in place a decade ago. Catlin's net underwriting contribution exceeded US$1 billion for the first time in 2013 because of our steadfast focus on underwriting discipline and our investment in building underwriting hubs outside of the London market.

Our attritional loss ratio - which measures the quality of our underwriting before exceptional losses and reserve movements are considered - remained at a low level of 50.1 per cent.  At the same time, the non-London underwriting hubs produced significantly higher net underwriting contributions than in previous years. In short, 2013 was a successful year for Catlin.

2013 financial results

Our focus on underwriting discipline and diversification combined to generate profits before tax totalling US$432 million, a 27 per cent increase from US$339 million in 2012.  Net income to common stockholders increased by 29 per cent to US$392 million (2012: US$305 million).  The return on net tangible assets was 17.0 per cent (2012: 14.6 per cent), whilst return on equity amounted to 13.4 per cent (2012: 11.3 per cent).

Catlin's annual average return on net tangible assets has amounted to 16.8 per cent since the Group's initial public offering in 2004, whilst the average return on equity was 13.2 per cent.  During the same period, the average risk free rate (as measured by 12-month US dollar Libor) was 2.5 per cent.

Compounded return on net tangible assets 2004-2013

	Return on net tangible assets	Cumulative return on net tangible assets	12-month US dollar Libor	Cumulative 12- month US dollar Libor plus 10 percentage points
2004	21.8%	21.8%	2.1%	12.1%
2005	2.2%	24.5%	4.3%	28.2%
2006	28.2%	59.7%	5.3%	47.8%
2007	36.1%	117.4%	5.1%	70.2%
2008	(2.8%)	111.3%	3.1%	92.5%
2009	33.2%	181.5%	1.6%	114.7%
2010	16.3%	227.4%	0.9%	138.2%
2011	1.7%	233.0%	0.8%	163.3%
2012	14.6%	281.4%	1.0%	192.3%
2013	17.0%	346.5%	0.7%	223.5%

Along with disciplined underwriting and diversification, the other two components of Catlin's underwriting strategy are capital preservation/flexibility and the 'Catlin Culture', which serves as the foundation for our actions, decisions and behaviour. I would like to examine each component of our strategy to analyse its impact on our 2013 operating results.

Underwriting discipline

Disciplined underwriting is the cornerstone of our strategy.  Since the Group was established in 1984, we have always sought to underwrite for a profit.  Whilst top-line growth can be good, bottom-line growth is always better. Our underwriters know that it is better to turn away business than to underwrite an account at an inadequate margin.

Our success as disciplined underwriters is measured by several of our key performance indicators:

·      Net underwriting contribution - our basic method of assessing underwriting performance - rose in 2013 by 27 per cent to a record US$1.00 billion (2012: US$788 million).

·      The attritional loss ratio of 50.1 per cent (2012: 50.6 per cent) was the second lowest in the past five years.

·      The loss ratio - including catastrophe and large single-risk losses and reserve movements - stood at 52.3 per cent, the lowest since 2007.

The Group did benefit from reduced claims for natural catastrophes as compared with recent years, although the US$156 million in catastrophe losses sustained in 2013, net of reinsurance and reinstatement premiums (2012: US$225 million), was not inconsiderable.  Rather, our strong underwriting performance was largely due to the fact that we continue to underwrite well because of our technical abilities and our risk selection skills, especially as competition increased in many markets as the year progressed. 

Average weighted premium rates rose slightly across our entire portfolio, but some areas were more promising than others; for example, rates for Casualty business increased by a weighted average of 6 per cent.  Each of our six product groups produced meaningful underwriting contributions, even those areas in which rates came under pressure.

Catlin's reserving policy is to establish loss reserves at a best estimate. This has resulted in small releases from prior-year loss reserves each year, another indicator of disciplined underwriting. During 2013 the Group released US$167 million from prior-year reserves (2012: US$139 million), which was equivalent to 3 per cent of opening reserves (2012: 3 per cent). I am happy to reiterate that Catlin has made a small release from loss reserves each year since the initial public offering in 2004.

Diversification

The other key to our underwriting success in 2013 was our international footprint.  The benefits of the Group's global platform were clearly demonstrated as the five underwriting hubs outside London combined to produce net underwriting contribution of US$480 million, an 83 per cent increase (2012: US$263 million). These hubs - US, Bermuda, Europe, Asia-Pacific and Canada - produced 48 per cent of the Group's net underwriting contribution, compared with 33 per cent in 2012.

Gross premiums written across the Group rose by 7 per cent in 2013 to US$5.31 billion (2012: US$4.97 billion), but this growth came entirely from the non-London underwriting hubs.  Combined, these five hubs' gross premiums written increased by 16 per cent, and they accounted for 53 per cent of the Group's total gross premium volume (2012: 49 per cent). 

Meanwhile, the gross premiums written by the London underwriting hub decreased by 2 per cent, whilst net underwriting contribution was virtually flat.  This performance is in line with expectations, as our London underwriting team chose not to renew some business in the light of the increased competition in the London wholesale market.

Whilst we are delighted by the performance outside London in 2013, we believe that there is still more profitable growth to come.  The Group sees tremendous opportunities in the United States, where the Catlin brand is increasingly recognised; in the Asia-Pacific region; and in Latin America.  Both our direct insurance and reinsurance operations in Europe are growing, with new offices being established in Stockholm and Copenhagen early this year.  In addition, the Group will soon establish its first presence in the Middle East with the opening of an office in Dubai.

Capital preservation and flexibility

Catlin regards capital as a precious commodity. A solid capital position is a requirement for clients, brokers, regulators and rating agencies.  Therefore, a priority of the Group is to ensure the preservation of our capital base and to utilise our capital in the most efficient and flexible manner possible.

The Group's capital position is strong.  Our capital buffer - the difference between available capital and required economic capital - stood at 21 per cent at 31 December 2013, just slightly above our target range of 10 per cent to 20 per cent.

One way we aim to preserve capital is through diversification, ensuring that our portfolio contains a broad spread of risk both by business class and geographic region.  We monitor accumulation of risk closely.  Our risk transfer programme functions as an efficient capital management tool and is designed to help preserve capital following major market events, particularly through the Catastrophe Aggregate programme. The Group's risk transfer programme includes both traditional reinsurers and non-traditional participants, including capital markets and collateralised counterparties.  During 2013 Catlin sponsored a catastrophe bond, Galileo Re Ltd, which provides annual aggregate protection for US windstorm, US earthquake, Canadian earthquake and European windstorm exposures for 2014.

We continually look at ways to increase the flexibility of our capital.  We do this both through our corporate structure, which allows us to allocate capital efficiently and rapidly to areas of the business where it is best utilised, and also through our third-party capital programme. This programme, which was put in place for 2012, was expanded both in 2013 and for the coming year.  We have added in 2014 to the three Special Purpose Syndicates ('SPS') at Lloyd's that have been in place since 2012 and that provide whole-account quota-share reinsurance to the Catlin Syndicate.   We have also established for 2014 a Portfolio Participation Vehicle ('PPV') that provides collateralised whole-account reinsurance protection for Catlin's business that is underwritten outside of Lloyd's. The PPV, which functions similarly to an SPS, has been backed by several third-party capital providers.

Combined, third-party capital sponsors have put up nearly US$300 million in capital for 2014.

The Group also continues to purchase an innovative Adverse Development Cover ('ADC') that, subject to limits, will protect against the significant deterioration of loss reserves relating to the 2011 and prior underwriting years during 2014. The ADC further improves the efficiency of our capital.

Catlin's investment strategy focuses on capital preservation by creating economic value whilst managing earnings risk and maintaining liquidity.  During 2013, this strategy was tested as rising interest rates resulted in significant mark-to-market losses in the Group's fixed income portfolio.  However, this was offset by strong performance from other investment classes and the decision to reduce fixed income duration during the second half of the year.  We believe that the total investment return of 1.5 per cent - or US$135 million - during 2013 was a good result under the circumstances (2012: 2.0 per cent or US$173 million).

For many years, investment return often contributed as much to an insurer's profits as its underwriting operations.  That's no longer the case and probably will not be for the foreseeable future. I am pleased that Catlin can produce an overall superior profit performance despite the fact that investment returns remain low.

Culture

We talk a lot about the 'Catlin Culture' and our core values.  That's because our culture and our values - transparency, accountability, teamwork, integrity and dignity - are thoroughly ingrained throughout our organisation.  Our culture places great emphasis on individual employees' personal responsibility, which encourages our staff to act like owners and therefore align their interests with those of shareholders.

What is interesting about the Catlin Culture is how it enables the Group to attract high-calibre employees. Many of the employees who have joined Catlin during the past several years - especially those in the United States - have told us that they wanted to work at Catlin because they heard about and identified with our culture. Of course, people who are attracted by our culture and values are exactly the type of employee we seek to hire. During the year, we surveyed our employees as to what they thought about working at Catlin. The results were positive although it did point out some areas in which we could do better, and we are addressing these areas.

Catlin's people represent the Group's greatest strength, and I take this opportunity to express my sincere thanks to all of them for their hard work.   

The Catlin Culture also fosters high levels of broker and client service.  We take service seriously, so much so that the claims service that we provide in London, as measured by the annual Gracechurch Claims Performance Monitor, is one of the Group's key performance indicators. I am happy to report that Catlin again ranked first overall in this survey during 2013, with the level of satisfaction reported by brokers still increasing. Our underwriters are respected for their technical knowledge, analytical abilities and professional judgment, which is one of the reasons that we lead a significant amount of the business that we underwrite. This will help us to retain business as markets grow more competitive, and we continually search for new ways in which we can improve our value proposition.

Our service ethos extends to the communities in which we operate.  We encourage our employees to become involved in their communities, especially with regard to programmes focused on education, young people and families. For example, more than 100 of our London employees since 2009 have worked with St Paul's Way Trust School, located in the East End of London, and a Catlin executive serves as a school governor and trustee.  Over the past five years, St Paul's Way has been transformed from a 'failing' school to one that has been assessed as 'Outstanding' in all categories by UK school inspectors.  I am honoured that Catlin has been able to play a small role in this success story.

Catlin is now well known for its leadership role in environmental research. I personally believe that insurers and reinsurers must learn more about how the environment is changing to understand the risks that lie ahead. That's why we sponsor the Catlin Seaview Survey and the Catlin Global Reef Record. It is amazing how little we know about life under the surface of our oceans, even though the oceans play such a key role in the global environment.

Outlook

According to some of the industry reports issued in recent weeks, insurers and reinsurers will face very hard times in 2014.  I, however, remain optimistic. Whilst it is clear that competition is on the increase and that rates for most classes of business are coming under increasing pressure, I believe there are still good opportunities for companies like Catlin.

Catlin's diversified underwriting portfolio - by region and by product - allows us to see business that many of our competitors never have the opportunity to write. Then, using our tested technical skills, we can select the business that we believe is most profitable.  It also must be remembered that rates for most classes of business are still good and that rates for some classes are still rising.

Significant amounts of new capacity are entering the marketplace, both traditional and non-traditional. Much of that capacity is targeted at Property Catastrophe risks, especially US business, a sector which constitutes an increasingly smaller percentage of our overall portfolio. Whilst many fear this competition, we embrace it.  We believe that we have the people, the strategy and, perhaps most importantly, the leadership position so that brokers and clients will want to ensure that Catlin continues to be part of their programmes.

To better compete, we have created a Strategic Transformation Programme to support our underwriters through the development of improved systems, processes and back-office functions.  A key to this strategy is the development of shared services: operations that are centralised in just a handful of offices but provide support to all employees Group-wide.  Whilst this programme has required initial investment, the benefits are already evident and will have a positive impact on our expense ratio in years to come. I would like to recognise the work of Adrian Spieler, Catlin's Chief Administrative Officer, for his leadership of this programme.

In short, Catlin continues to build a business for the future, and we look ahead with confidence.

Stephen Catlin

Chief Executive

7 February 2014

Key Performance Indicators

Catlin uses ten key performance indicators to measure its delivery against strategic objectives. The overall performance KPIs are relevant to the Group's performance-related bonus and employee share plans.

Overall Performance KPIs

Book value per share plus dividends (US$)

US$	Book value per share	Dividends per share paid during year	Book value per share plus dividends
2009	7.68	0.37	8.05
2010	8.34	0.40	8.74
2011	7.85	0.44	8.29
2012	8.32	0.45	8.77
2013	8.92	0.47	9.39

The Group believes that the change in book value per share, plus the common share dividend paid during a calendar year, is an appropriate measure of shareholder value creation.  Shareholder value using this metric increased by 13 per cent during 2013. The vesting conditions of Catlin's performance-related share plans are based on growth in book value per share plus dividends paid during rolling three- and four-year periods.

Net tangible assets per share plus dividends (US$)

US$	Net tangible assets per share	Dividends per share paid during year	Net tangible assets per share plus dividends
2009	5.90	0.37	6.27
2010	6.53	0.40	6.93
2011	6.08	0.44	6.52
2012	6.56	0.45	7.01
2013	7.17	0.47	7.64

Shareholder value can also be measured on a similar basis by combining the annual increase in net tangible assets per share with the dividends paid to shareholders during a calendar year. Growth in net tangible assets per share assesses the Group's performance against its underwriting capital, which excludes goodwill and other intangibles. Measured on this basis, shareholder value increased by 16 per cent during 2013.

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

		Return on equity	Return on net tangible assets
2009		24.3%	33.2%
2010		12.5%	16.3%
2011		1.3%	1.7%
2012		11.3%	14.6%
2013		13.4%	17.0%

Catlin aims to produce a return on equity that is 10 percentage points above the risk-free rate over an underwriting cycle. Catlin has exceeded this target on a cumulative basis since its IPO in 2004. In 2013 return on equity amounted to 13.4 per cent, whilst return on net tangible assets was 17.0 per cent.

Net income before income tax (US$m)

	Net income before tax
2009	603
2010	406
2011	71
2012	339
2013	432

Pre-tax profitability is an effective measure of the combination of underwriting performance, expense control and investment return.  The strong underwriting performance during 2013 was the primary driver of the 27 per cent increase in profits before tax to US$432 million.

Disciplined Underwriting KPIs

Net underwriting contribution (US$m)

	Net underwriting contribution
2009	651
2010	683
2011	324
2012	788
2013	1,003

Net underwriting contribution is the principal measure of Catlin's underwriting performance.  The Group produced record net underwriting contribution in 2013 of US$1.00 billion, which reflected the Group's focus on disciplined underwriting and superior portfolio management, along with a reduction in catastrophe and large single-risk losses.

Loss ratio/Attritional loss ratio (%)

	Loss ratio	Attritional loss ratio
2009	57.6%	53.7%
2010	57.5%	51.6%
2011	70.0%	50.0%
2012	56.0%	50.6%
2013	52.3%	50.1%

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is another measure of underwriting performance.  The attritional loss ratio - which excludes catastrophe and large single-risk losses and reserve movements - is a measure of underlying underwriting profitability. The 2013 loss ratio of 52.3 per cent was the lowest since 2007, whilst the attritional loss ratio remained low.

Diversification KPI

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

	Gross premiums written outside London/UK hub
2009	36.8%
2010	42.9%
2011	48.1%
2012	49.2%
2013	53.4%

A key component of the Group's operating strategy is geographic diversification. Over the past decade, Catlin has established underwriting hubs outside its traditional London base.  This has not only reduced the Group's reliance on London wholesale business, it has helped Catlin build stronger relationships with brokers and clients worldwide. More than 53 per cent of Catlin's business was produced by the non-London hubs in 2013.

Capital Preservation and Flexibility KPI

Capital buffer (%)

	Capital buffer
2009	19.0%
2010	20.3%
2011	13.8%
2012	14.0%
2013	20.8%

Catlin defines available capital as its net tangible assets and the perpetual preferred shares issued by Catlin Bermuda. The Group strives to maintain a buffer of available capital that is between 10 per cent and 20 per cent of required economic capital.  The capital buffer at 31 December 2013 stood at 20.8 per cent, an increase from 14 per cent a year earlier and just above the targeted range.

Culture KPIs

Claims performance (%)

	Claims performance
2009	34%
2010	31%
2011	31%
2012	33%
2013	35%

Catlin believes that an insurer provides greatest value to clients following a claim.  Catlin uses a survey by Gracechurch Consulting to measure claims handling performance. The survey asks London market claims brokers to rate insurers' claims handling performance: the score is the percentage of brokers rating an insurer as 'excellent' minus those rating the insurer as 'poor'. Catlin has ranked first by this measure for the past five years and in 2013 ranked nine percentage points ahead of its closest competitor.

Employee turnover (%)

	Employee turnover
2009	10.4%
2010	9.8%
2011	12.7%
2012	9.9%
2013	8.1%

Catlin's most important resource is its people, and the Group places great emphasis on attracting and retaining high-calibre employees. The employee turnover rate measures the Group's success in retaining staff.  The voluntary employee turnover rate decreased during 2013 to 8.1 per cent, the lowest in five years. Voluntary turnover among underwriting employees amounted to 7.3 per cent.

Underwriting Review

Catlin produced a record underwriting performance during 2013, with net underwriting contribution increasing by 27 per cent to US$1.00 billion (2012: $788 million). This performance is compared with the previous four years in the table below.

Net underwriting contribution (US$m)

	Net underwriting contribution
2009	651
2010	683
2011	324
2012	788
2013	1,003

The Group's continued focus on disciplined underwriting, combined with geographic and product diversification, resulted in an attritional loss ratio of 50.1 per cent (2012: 50.6 per cent).

Gross premiums written grew by 7 per cent to US$5.31 billion (2012: US$4.97 billion), with the volume written by the non-London underwriting hubs rising by 16 per cent, a reflection of the previous investment in the Group's international underwriting infrastructure. The five non-London hubs produced net underwriting contribution amounting to US$480 million, an 83 per cent increase. This demonstrates the advantage of Catlin's access to worldwide distribution, especially during periods when certain markets grow more competitive.

The Group believes that its on-going strategy of underwriting discipline and diversification by geography and product leaves it well-positioned for 2014 and beyond, irrespective of market conditions.

Market review

Loss experience

Insured losses arising from natural catastrophes decreased substantially during 2013 compared with the record levels of 2011 - which included two New Zealand earthquakes, the Japanese earthquake/tsunami and severe US tornado losses - and Windstorm Sandy in 2012. Swiss Re Sigma estimates that natural catastrophes worldwide during 2013 caused US$38 billion in insured damage and US$115 billion in total economic damage, compared with US$75 billion and US$187 billion, respectively, in 2012.

The ten largest natural catastrophes during 2013 in terms of insured losses are listed in the following table.

Largest insured natural catastrophe events in 2013¹

Dates	Event	Location	Estimated fatalities	Structures damaged	Estimated economic loss (US$bn)	Estimated insured loss (US$bn)2
May/June	Flooding	Central Europe	25	150,000	22.0	5.3
27-28 July	Severe weather	Germany, France	0	750,000	4.0	3.0
January-December	Drought	United States	N/A	N/A	3.5	2.8
18-22 May	Severe weather	United States	29	160,000	3.8	2.0
June	Flooding	Canada	4	25,000	5.2	1.7
18-20 March	Severe weather	United States	2	250,000	2.5	1.6
7-10 November	Typhoon Haiyan	Philippines, Vietnam	8,000	1,300,000	13.0	1.5
26 May-2 June	Severe weather	United States	27	150,000	2.3	1.4
27-29 October	Windstorm Christian	Western/ Northern Europe	18	50,000	2.0	1.4
7-11 April	Severe weather	United States	3	135,000	1.8	1.1

1 Estimates as at January 2014

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

Source: Aon Benfield

Whilst various researchers who study tropical cyclone activity predicted that 2013 would be a very active year for North Atlantic hurricanes, it actually was one of the quietest seasons in decades. There were only 13 named North Atlantic tropical storms, the fewest in five years, with only two developing into hurricanes and none classified as a major hurricane (Category 3+). It was also the first season since 1968 in which no hurricanes strengthened beyond Category 1.

The most notable North Atlantic tropical cyclone was Hurricane Ingrid, which struck northern Mexico in September as a Category 1 storm. Ingrid combined with the Eastern Pacific's Hurricane Manuel to cause extensive flood damage in Mexico.  The two storms together caused approximately US$1 billion in insured losses.

An exceptionally powerful Pacific cyclone, Typhoon Haiyan (also known as Typhoon Yolanda in the Philippines) caused the largest loss of life of any natural catastrophe in 2013. Haiyan devastated portions of Southeast Asia, particularly the Philippines, in early November, killing at least 6,000 people in that country alone.  Haiyan is now regarded as the strongest storm ever recorded at landfall, with sustained winds of 195 mph (315 kph). However, due to low insurance penetration in most of the devastated areas, insured losses were estimated at only US$1.5 billion.

Pricing

Average weighted premium rates across Catlin's underwriting portfolio increased by 0.8 per cent during 2013 (2012: 4.0 per cent increase). Average weighted premium rates decreased by 0.2 per cent for catastrophe-exposed business classes and increased by 1.3 per cent for non-catastrophe classes.

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

Rating indexes for catastrophe and non-catastrophe business classes 1999-2013 (%)

Year	Catastrophe classes	Non-catastrophe classes	All classes
1999	100%	100%	100%
2000	107%	103%	105%
2001	135%	135%	135%
2002	193%	175%	181%
2003	213%	200%	204%
2004	207%	208%	206%
2005	205%	205%	204%
2006	256%	200%	217%
2007	251%	190%	209%
2008	230%	187%	200%
2009	253%	193%	211%
2010	250%	189%	208%
2011	261%	189%	211%
2012	283%	192%	220%
2013	282%	195%	221%

Rating index base: 100 per cent in 1999

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

Rating indexes for product groups 1999-2013 (%)

	Aerospace	Casualty	Energy/Marine	Property	Reinsurance	Specialty/War & Political Risk
1999	100%	100%	100%	100%	100%	100%
2000	107%	101%	107%	107%	105%	104%
2001	116%	138%	135%	137%	123%	145%
2002	135%	171%	186%	188%	170%	209%
2003	134%	222%	220%	203%	188%	221%
2004	134%	236%	224%	198%	190%	217%
2005	130%	227%	228%	194%	192%	210%
2006	121%	215%	255%	219%	230%	207%
2007	109%	204%	245%	206%	232%	200%
2008	107%	197%	230%	191%	219%	205%
2009	114%	203%	248%	197%	237%	210%
2010	111%	197%	250%	195%	234%	201%
2011	106%	201%	255%	200%	242%	196%
2012	98%	211%	261%	213%	258%	194%
2013	90%	224%	260%	218%	258%	191%

Rating index base: 100 per cent in 1999

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

Average weighted premium rate movements by product group 2012-2013 (%)

	2013	2012
Aerospace	(8%)	(7%)
Casualty	6%	5%
Energy/Marine	0%	2%
Property	2%	6%
Reinsurance	0%	7%
Specialty/War & Political Risk	(1%)	(1%)

Rates for Aerospace business, particularly the Airline account, continue to decrease year on year, largely the result of benign loss experience in recent years creating significant pressure on pricing.

Overall, average weighted rates for Casualty classes increased by 6 per cent during 2013. Rates continued to increase strongly for most classes of US Casualty business, which helped improve results for both the London and the US hubs, which write significant books of US Casualty risks. In addition, rates for the Group's UK Motor business continued to improve, contrary to wider market trends.

Increases in weighted average premium rates for Energy/Marine business in early 2013 were offset by decreases later in the year, creating a net nil effect for the year as a whole. Rate increases for Downstream Energy business and Energy Liability business were counterbalanced by decreasing rates for Upstream Energy risks. Marine rates were generally flat across all sub-sectors (Cargo, Hull and Specie).

Property Treaty Excess of Loss reinsurance and other catastrophe classes began the year with modest pricing increases in the aftermath of Windstorm Sandy, but the combination of increased capacity for catastrophe risks - both from traditional and non-traditional sources - and the reduction in catastrophe losses caused rates to generally decrease during subsequent renewal periods.

Rate movements for Property Catastrophe Excess of Loss reinsurance from 1 June 2011 onwards are shown in the table below.

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

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

Rates for Direct Property business classes, particularly US risks, generally increased during 2013 as a result of Windstorm Sandy in October 2012. Average weighted premium rates for direct Property business rose by 2 per cent during the year.

Overall rating for Specialty/War & Political Risk classes of business stayed broadly flat in 2013. Rates for Specialty Lines generally increased during 2013, largely driven by rate adjustments on poor-performing Accident & Health and Equine/Livestock individual accounts. War and Political Risk rates generally decreased during 2013, reflecting benign loss experience and increased competition in the market.

Gross premiums written

Gross premiums written by the Group increased by 7 per cent during 2013 to US$5.31 billion (2012: US$4.97 billion).

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

Gross premiums written by financial reporting segment 2009-2013 (US$m)

	2013	2012	2011	2010	2009
London	2,474	2,525	2,342	2,323	2,347
US	1,213	1,045	852	707	581
Bermuda	577	523	549	502	421
International	1,045	879	770	537	366
Total	5,309	4,972	4,513	4,069	3,715

As in most of the past several years, nearly all of the Group's premium growth has been produced by Catlin's underwriting hubs in Bermuda, the United States, the Asia-Pacific region, Europe and Canada. These five hubs continued to grow during 2013, with aggregate gross premiums written increasing by 16 per cent to US$2.84 billion (2012: US$2.45 billion). The non-London hubs accounted for 53 per cent of the Group's 2013 gross premiums written (2012: 49 per cent).

Gross premiums written by the London underwriting hub in 2013 amounted to US$2.47 billion (2012: US$2.53 billion), a 2 per cent decrease. The hub's decreased volume was attributable to the decision not to renew some business in the light of increased competition as well as reduced reinstatement premiums compared with 2012, reflecting the improved catastrophe loss experience.  

The Bermuda hub's volume increased by 10 per cent due to a number of new contracts written and increased line sizes on specific Structured Quota Share contracts.

Gross premiums written by Catlin US grew by 16 per cent to US$1.21 billion (2012: US$1.05 billion). Volume written by the US hub continued to increase in many lines of business, including Direct Casualty classes,  Casualty Treaty and Facultative Reinsurance, Energy and Marine.

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

Gross premiums written by international underwriting hubs 2009-2013 (US$m)

	2013	2012	2011	2010	2009
Europe	540	444	354	229	175
Asia-Pacific	373	319	304	217	129
Canada	132	116	112	91	62
Total	1,045	879	770	537	366

Gross premiums written by the Europe underwriting hub rose by 22 per cent to US$540 million (2012: $444 million), due to solid growth on both the Direct and Reinsurance sides of the business.  The Asia-Pacific hub's gross premiums written rose by 17 per cent to US$373 million (2012: US$319 million) with growth across nearly all classes, notably Direct Property and Specialty Reinsurance. Catlin Canada produced 14 per cent growth in gross premiums written to US$132 million (2012: US$116 million), with consistent growth seen across most portions of the hub's book of business.

Underwriting performance

The Group produced US$1.00 billion of net underwriting contribution in 2013 (2012: $788 million), an increase of 27 per cent. This strong underwriting performance was driven by the low attritional loss ratio combined with a reduced level of catastrophe losses compared with 2012.

The Group's loss ratio amounted to 52.3 per cent in 2013 (2012: 56.0 per cent), the lowest since 2007 by a significant factor. A historic comparison of the Group's loss ratio is shown in the table below.

Loss ratio 2009-2013 (%)

	Loss ratio
2009	57.6%
2010	57.5%
2011	70.0%
2012	56.0%
2013	52.3%

A comparison of the components of the loss ratio in 2012 and 2013 is shown in the table below.

Components of loss ratio 2012-2013 (%)

	2013	2012
Attritional loss ratio	50.1%	50.6%
Catastrophe losses	4.3%	7.0%
Large single-risk losses	2.1%	2.3%
Release of reserves	(4.2%)	(3.9%)
Reported loss ratio	52.3%	56.0%

The attritional loss ratio - which excludes catastrophe losses, large single-risk losses and prior-year reserve movements - improved to 50.1 per cent (2012: 50.6 per cent). The attritional performance demonstrates the Group has maintained strong underwriting discipline whilst continuing to expand its business, even in a year where conditions were competitive for many classes.

Catastrophe losses amounted to US$156 million, net of reinsurance and reinstatement premiums (2012: US$225 million). Catastrophe events in the aggregate accounted for 4.3 percentage points of the loss ratio (2012: 7.0 percentage points). Included among the 2013 catastrophe events were losses produced by the Calgary floods in June, the floods in Central Europe in May and June and the severe hailstorms in Germany in July. 

Large single-risk losses during 2013 amounted to US$79 million (2012: US$78 million), net of reinsurance and reinstatement premiums, which represented 2.1 percentage points of the loss ratio (2012: 2.3 percentage points).  Large single-risk losses are defined as losses arising from man-made causes that exceed expected severity for a given class of business, typically in excess of US$10 million, gross of reinsurance.

The Group released US$167 million from prior-year loss reserves during 2013 (2012: US$139 million), equivalent to 3.2 per cent of opening reserves (2012: 2.6 per cent). The reserve release reduced the 2013 loss ratio by 4.2 percentage points (2012: 3.9 percentage points).

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

Underwriting performance by reporting segment 2012-2013 (US$m)

	London	US	Bermuda	International	Group
2013
Gross premiums written	2,474	1,213	577	1,045	5,309
Net premiums written	1,799	916	490	847	4,052
Net premiums earned	1,832	858	486	772	3,948
Underwriting contribution	523	168	183	129	1,003
Loss ratio	48.1%	59.6%	39.1%	62.3%	52.3%
Attritional loss ratio	48.0%	57.0%	34.5%	57.5%	50.1%
2012
Gross premiums written	2,525	1,045	523	879	4,972
Net premiums written	1,883	826	438	687	3,834
Net premiums earned	1,850	733	415	606	3,604
Underwriting contribution	525	88	102	73	788
Loss ratio	48.4%	68.9%	51.9%	66.7%	56.0%
Attritional loss ratio	44.9%	58.4%	40.6%	65.4%	50.6%

Despite small decreases in gross premiums written and net premiums earned, the London hub's net underwriting contribution was broadly flat at US$523 million (2012: US$525 million). The attritional loss ratio increased to 48.0 per cent (2012: 44.9 per cent), impacted partly by the small decrease in net premiums earned and an increase in Aerospace attritional losses.

The net underwriting contribution produced by Catlin US increased by 91 per cent to US$168 million (2012: US$88 million), with the attritional loss ratio improving to 57.0 per cent (2012: 58.4 per cent), driven in part by higher rates for classes of Casualty business.

The Bermuda hub, which largely writes Property Treaty and Specialty Reinsurance, increased net underwriting contribution by 79 per cent to US$183 million (2012: US$102 million). Catlin Bermuda benefitted from better catastrophe loss experience than in previous years and improved performance from its book of Agricultural Reinsurance.

Net underwriting contribution from the International segment increased by 77 per cent to US$129 million (2012: US$73 million). This was largely due to a significant improvement in the attritional loss ratio to 57.5 per cent (2012: 65.4 per cent).  However, the contribution produced by the International segment was reduced by significant increases in catastrophe losses sustained by the Europe and Canada hubs.

Product groups

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

Gross written premiums by product group 2012-2013 (US$m)

Aerospace Product Group

	2013	2012
Aviation	329	349
Satellite	26	33
Total	355	382

Casualty Product Group

	2013	2012
General Casualty	444	332
Professional/Financial	424	386
Marine	115	88
Motor	184	216
Total	1,167	1,022

Energy/Marine Product Group

	2013	2012
Upstream Energy	247	218
Downstream Energy	106	107
Energy Liability	129	95
Cargo	161	155
Hull	117	125
Specie	76	72
Total	836	772

Property Product Group

	2013	2012
International	339	344
US	144	117
Binding Authorities	146	111
Total	629	572

Reinsurance Product Group

	2013	2012
Non-Proportional Property	801	776
Proportional Property	465	403
Casualty	258	224
Specialty	195	200
Marine	131	163
Total	1,850	1,766

Specialty/War & Political Risks Product Group

	2013	2012
War & Political Risks, Terrorism & Credit	217	213
Accident & Health	127	128
Equine/Livestock	104	86
Contingency	26	24
Total	474	451

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

Underwriting results by product group 2012-2013 (US$m)¹

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	Rate change
2013
Aerospace	355	271	279	84	47%	(8%)
Casualty	1,167	899	830	162	61%	6%
Energy/Marine	836	607	606	143	54%	0%
Property	629	501	487	109	49%	2%
Reinsurance	1,850	1,630	1,594	395	53%	0%
Specialty/War & Political Risks	474	426	407	178	36%	(1%)
2012
Aerospace	382	279	291	98	44%	(7%)
Casualty	1,022	741	709	51	73%	5%
Energy/Marine	772	593	542	104	57%	2%
Property	572	465	414	30	63%	6%
Reinsurance	1,766	1,574	1,378	278	60%	7%
Specialty/War & Political Risk	451	419	398	221	23%	(1%)

1 Product group data excludes the effects of claims handling costs, bad debt charges and cessions to Special Purpose Syndicates and the Adverse Development Cover.

Following yet another year of relatively benign loss experience, gross premiums written for Aerospace classes decreased by 8 per cent. Due to a low level of large losses and the fact that insurers are still producing good profits despite several years of decreasing rates, competition for Aerospace risks - particularly Airline accounts - remains high. 

Gross Casualty premiums grew 14 per cent in 2013, with significant growth in net underwriting contribution to US$162 million for 2013 (2012: US$51 million), reflecting the improved rating environment. Growth in the Casualty product group came from continued traction across a number of lines; particularly in the United States, where rates have been increasing for several years.

Volume for the Group's Energy/Marine portfolio grew by 8 per cent in 2013, driven by growth in Energy underwriting in both the London and US hubs. The portfolio produced a 38 per cent increase in underwriting contribution, driven by improved loss experience from Marine classes compared with 2012, which included the sinking of the Costa Concordia.  

The Property product group's gross premiums written grew by 10 per cent during 2013, helped by price increases in the aftermath of Windstorm Sandy and an increase in business written by the International segment. Underwriting contribution increased to US$109 million (2012: US$30 million), due to improved loss experience and the impact of rate increases.

The Reinsurance product group increased gross premiums written by 5 per cent during 2013. Part of the increase came from Catlin US, which reported increased Casualty Treaty and Facultative business. The Reinsurance loss ratio improved by 7 percentage points, largely due to decreased catastrophe loss experience, which resulted in an increase in underwriting contribution of 42 per cent.

The Reinsurance product group is a diverse portfolio of business, including both catastrophe and non-catastrophe-exposed business.  The development of the Reinsurance portfolio over the past five years is illustrated in the following table.

Development of Reinsurance Product Group gross premiums written 2009-2013 (US$m and %)

	2013	2012	2011	2010	2009
Gross premiums written	1,850	1,766	1,593	1,289	1,116
Percentage of total
Non-Proportional Property	43%	44%	49%	51%	55%
Proportional Property	25%	23%	23%	23%	16%
Casualty	14%	13%	11%	13%	12%
Specialty	11%	11%	9%	5%	5%
Marine	7%	9%	8%	8%	12%

Over the same period as the Group significantly increased the size of its overall reinsurance portfolio, it reduced the percentage of the portfolio devoted to Non-Proportional Property business, which primarily includes Catastrophe business. In addition, within the Non-Proportional Property book, the percentage of business pertaining to US exposures has decreased from 73 per cent in 2009 to 52 per cent in 2013.

Gross premium volume for the Group's Specialty/War & Political Risks portfolio rose by 5 per cent, largely due to growth in Specialty business written by Catlin Europe. The portfolio continues to perform well, producing a 36 per cent loss ratio.

2014 renewals

Average weighted premium rates for business that renewed on 1 January 2014 decreased by 3.2 per cent. Rates for catastrophe-exposed classes decreased by 6.0 per cent, whilst rates for non-catastrophe business classes decreased 0.9 per cent.

Overall, gross premiums written as at 31 January 2014 increased by 4 per cent.

Rate movements at 1 January 2014 for the six product groups are shown in the table below.

Average weighted premium rate movements by product group at 1 January 2013 and 2014 (%)

	1 January 2014	1 January 2013
Aerospace	(5%)	(4%)
Casualty	4%	1%
Energy/Marine	(2%)	1%
Property	(1%)	5%
Reinsurance	(5%)	2%
Specialty/War & Political Risk	(2%)	(1%)

1 January is a major renewal date for Property Treaty Excess of Loss Reinsurance. In addition to general market pressures, this class of business was also impacted by the increase in non-traditional capacity, reduced demand from cedants and, in some cases, pressure to alter terms and conditions.

Average weighted premiums rates for Property Treaty Excess of Loss business decreased by 8.8 per cent overall, with rates for US business falling an average of 12.1 per cent and international rates decreasing by 6.4 per cent. On balance, rate movements for European exposures, especially low-layer treaties, were more favourable than for business in other regions due to the significant weather-related losses sustained in 2013.

Based on January renewals, 2014 pricing for Property Catastrophe business is broadly similar to 2010-11 levels.

Despite the competitive pressures, the Group retained accounts when desired, maintained signings and in some instances obtained preferred terms due to the strong relationships formed over the years with ceding companies. Cedants are increasingly instructing brokers as to which reinsurers to approach, and the Group believes that it is generally on cedants' shortlists due to its leadership position and technical capabilities.

Underwriting outlook

The positive rate environment that prevailed from 2011 to 2013 appears to have run its course, partly due to the increase in capacity offered by both traditional and non-traditional players, and improved loss experience across a number of business classes.

The Group now faces a more challenging marketplace, particularly in terms of pricing.  However, Catlin is in an excellent position to compete amid these market conditions, Whilst rates are coming under pressure, acceptable margins exist across Catlin's portfolio.

Catlin's core strengths allow it to prosper in all types of market environments. Underwriting discipline is at the heart of Catlin's operating strategy, and the Group's underwriters have the technical tools - as well as the experience and professional judgment - to assess whether pricing for a particular account is adequate for the potential exposure. 

Moreover, the Group has built strong relationships with brokers and individual clients during nearly 30 years of trading. Brokers look to Catlin for professionalism, leadership abilities and superior service, both as business is placed and after claims arise.

Finally, Catlin utilises its underwriting abilities and relationships to select from a wide portfolio of business, produced by underwriting hubs located around the world that write a broad spectrum of business classes.  Our investment in global distribution produced excellent underwriting results in 2013 and will become even more important in 2014 and beyond.

Financial Review

Consolidated Results of Operations (US$m)

	2013	2012	% change
Revenues
Gross premiums written	5,309	4,972	7%
Reinsurance premiums ceded	(1,257)	(1,138)	10%
Net premiums written	4,052	3,834	6%
Change in net unearned premiums	(104)	(230)	(55%)
Net premiums earned	3,948	3,604	10%
Net investment return	124	158	(22%)
Net losses on foreign currency	(26)	(15)	(73%)
Other income	11	8	38%
Total revenues	4,057	3,755	8%
Expenses
Losses and loss expenses	2,063	2,020	2%
Policy acquisition costs	882	796	11%
Administrative and other expenses	661	586	13%
Financing costs	19	14	36%
Total expenses	3,625	3,416	6%
Net income before income tax	432	339	27%
Income tax benefit	4	10	N/M
Net income	436	349	25%
Non-controlling preferred stock dividend	(44)	(44)	-
Net income available to common stockholders	392	305	29%

	2013	2012
Loss ratio1	52.3%	56.0%
Expense ratio2	33.3%	34.0%
Combined ratio3	85.6%	90.0%
Tax rate4	(0.9%)	(2.8%)
Return on net tangible assets5	17.0%	14.6%
Return on equity 6	13.4%	11.3%
Total investment return 7	1.5%	2.0%

N/M   Not meaningful

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

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

3       Total of loss ratio plus expense ratio

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

5       Calculated as net income available to common stockholders divided by net tangible assets (opening common stockholders' equity less intangible assets and associated deferred tax)

6       Calculated as net income available to common stockholders divided by opening common stockholders' equity

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

Catlin's income before tax amounted to US$432 million in 2013, an increase from $339 million in the previous year. This result was primarily driven by the 27 per cent increase in net underwriting contribution to US$1.00 billion (2012: US$788 million), reflecting a decrease in the loss ratio to 52.3 per cent (2012: 56.0 per cent).  The Group produced a strong underwriting performance in 2013 despite the impact of catastrophe losses amounting to US$156 million, net of reinsurance and reinstatement premiums.

Another key driver of income before tax is total investment return.  The Group produced total investment return of 1.5 per cent (2012: 2.0 per cent), which amounted to US$135 million (2012: US$173 million).  The return was above the Group's expectations given the rise in interest rates during the year.

An analysis of net income before income tax is shown in the table below.

Net income before income tax (US$m)

	2013	2012	% change
Net underwriting contribution	1,003	788	27%
Total investment return	135	173	(22%)
Administrative expenses - controllable	(383)	(385)	(1%)
Administrative expenses - non controllable	(52)	(46)	13%
Administrative expenses - corporate	(226)	(155)	46%
Financing and other	(19)	(21)	10%
Foreign exchange	(26)	(15)	(73%)
Net income before income tax	432	339	27%

The following commentary compares the Group's 2013 financial results with the results for 2012. The impact of using constant exchange rates on year-to-year changes is insignificant.

Gross premiums written

Gross premiums written increased by 7 per cent to US$5.31 billion (2012: US$4.97 billion).

Aggregate gross premiums written by the Group's underwriting hubs apart from the London hub (Bermuda, US, Asia-Pacific, Europe and Canada) increased substantially, rising by 16 per cent to US$2.84 billion (2012: US$2.45 billion).  These underwriting hubs accounted for 53 per cent of the total gross premiums written by the Group (2012: 49 per cent).

Rates increased slightly during the year for many classes of business with average weighted premium rates rising by 1 per cent across the portfolio.  Rates for catastrophe-exposed classes of business remained broadly flat, whilst average weighted premium rates for non-catastrophe classes increased by just more than 1 per cent.

Reinsurance premiums ceded

Reinsurance premiums ceded increased by 11 per cent to US$1.26 billion (2012: US$1.14 billion). The percentage of gross premiums written ceded to reinsurers increased to 24 per cent (2012: 23 per cent).  This reflects increased amounts ceded during 2013 to the three Special Purpose Syndicates ('SPS'), part of the Group's third-party capital programme, which provide whole-account quota share reinsurance to the Catlin Syndicate at Lloyd's. It also reflects growth in classes of business protected by proportional reinsurance.

In any given year, the Group may benefit from managing agent's fees, overriding commissions and profit commissions (if applicable) with respect to an SPS. These amounts are usually recognised during the calendar year for which the SPS accepts risk and for two additional years.

Total commissions and fees from the SPS recognised in 2013 amounted to US$28 million (2012: $14 million).

Net premiums earned

Net premiums earned increased by 10 per cent to $3.95 billion (2012: US$3.60 billion). This increase, which was in line with the Group's expectations, was due to the increase in gross premiums written. 

Growth in 2014 net premiums earned will be reduced by 4 to 5 absolute percentage points, largely due to the increased amounts ceded to third-party capital providers.

Losses and loss expenses

The Group's loss ratio decreased to 52.3 per cent during 2013 (2012: 56.0 per cent). 

The Group incurred catastrophe losses in 2013 which totalled US$156 million, net of reinsurance and reinstatements (2012: US$225 million). Included among the 2013 catastrophe events were floods in Calgary, Alberta, in June; floods in Central Europe in May and June; severe hailstorms in Germany in July; and the tornadoes that devastated areas in Oklahoma in May. 

The components of the Group's loss ratio in 2013 and 2012 are analysed in the table below.

Analysis of loss ratio (%)

	2013	2012
Attritional loss ratio	50.1%	50.6%
Catastrophe losses	4.3%	7.0%
Large single-risk losses	2.1%	2.3%
Release of reserves	(4.2%)	(3.9%)
Reported loss ratio	52.3%	56.0%

The large single-risk losses sustained by the Group in 2013 increased the loss ratio by 2.1 percentage points (2012: 2.3 percentage points).

The Group released US$167 million from prior-year loss reserves during 2013, an amount equating to 3 per cent of opening reserves (2012: US$139 million or 3 per cent). The level of reserve releases made annually has been broadly consistent since the Group's initial public offering in 2004.

Net underwriting contribution

The 2013 net underwriting contribution of US$1.00 billion represents a 27 per cent increase (2012: US$788 million). Of the total underwriting contribution, 52 per cent was produced by the London underwriting hub; 48 per cent was produced by the Group's other underwriting hubs (2012: 67 per cent London, 33 per cent other).

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 33.3 per cent (2012: 34.0 per cent). The components of the expense ratio and corporate expenses are analysed in the table below.

Analysis of expense ratio (US$m and %)

US$m	2013	Components  of expense ratio	2012	Components  of expense ratio
Policy acquisition costs	882	22.3%	796	22.1%
Administrative expenses
Controllable expenses	383	9.7%	385	10.7%
Non controllable expenses	52	1.3%	46	1.2%
Corporate expenses	226	-	155	-
Administrative and other expenses	661	11.0%	586	11.9%
	1,543	33.3%	1,382	34.0%

The policy acquisition cost ratio increased to 22.3 per cent (2012: 22.1 per cent). Administrative expenses represent 11.0 percentage points of the overall expense ratio (2012: 11.9 percentage points). 

When calculating the expense ratio, Catlin excludes some corporate expenses such as profit-related bonuses, employee share compensation schemes and certain Group corporate costs to allow the expense and combined ratios to provide a closer representation of the costs of underwriting.

The decrease in the administrative expense ratio in 2013 is a result of changes made to the Group's bonus plan during 2013, whereby no minimum personal performance bonus is guaranteed in low-profit years. As a result, the personal performance bonus which was included in controllable expenses in 2012 and prior years (2012: US$24 million), has been reclassified for 2013 as profit-related-bonus and is included in corporate expenses, which decreased the 2013 expense ratio by 0.7 percentage points when compared to 2012.  This reclassification has increased corporate expenses by US$28 million in 2013.

Altogether, corporate expenses increased by 46 per cent to US$226 million (2012: US$155 million) due to this change and higher incentive-based compensation, reflecting increased profitability.  

Total investment return

Total investment return amounted to 1.5 per cent (2012: 2.0 per cent). The table below summarises the total investment return during the year.

Total investment return (US$m)

	2013	2012
Total investments and cash as at 31 December	9,217	8,774
Investment income	127	138
Net gains/(losses) on fixed maturities and short-term investments	(94)	48
Net gains/(losses) on other invested assets	102	(13)
Total investment return	135	173
Investment expenses	(11)	(15)
Net investment return	124	158

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

Net losses on foreign currency

Catlin reported a loss on foreign currency exchange amounting to US$26 million (2012: US$15 million). Catlin's reporting currency is US dollars, but it undertakes significant transactions in various currencies. Exchange rate movements during the year have resulted in the net exchange loss on these currency positions, most notably on balances denominated in Australian dollars, which weakened by 14 per cent against the US dollar during 2013. The loss on foreign exchange partly arises on the depreciation of foreign currency assets held in entities with a sterling functional currency. Gains or losses on translating the net assets of these entities into US dollars are recorded as other comprehensive income.

Financing costs

Financing costs amounted to US$19 million (2012: US$14 million). Financing costs comprise interest and other costs in respect of bank financing, together with the costs of subordinated debt.  Dividends relating to the non-controlling preferred stock are treated as an appropriation of net income and are not included in financing costs.

Income tax

The Group's effective tax rate was negative 0.9 per cent (2012: negative 2.8 per cent).

The negative tax rate arises from a US$20 million deferred tax benefit in the United Kingdom. This benefit arises from a reduction in the carrying value of deferred tax liabilities as a result of a reduction in the UK corporate tax rate to 21 per cent in April 2014 from 23 per cent; the rate will be reduced further to 20 per cent in April 2015. The benefit is partially offset by a tax charge of US$16 million in respect of income tax on profits. 

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

The Group's total contributions to tax authorities in the various jurisdictions in which it operates amounted to US$239 million in 2013 (2012: US$192 million). A breakdown of these contributions is shown in the table below.

Tax contributions (US$m)

	2013	2012
Corporate income taxes	19	10
Employment and social security taxes1	154	114
Insurance premium taxes2 and federal excise tax	56	60
Irrecoverable value-added taxes	10	8
	239	192

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

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

Approximately half of the tax contributions by the Group during 2013 and 2012 were payable to UK tax authorities.

Net income available to common stockholders

After payment of dividends amounting to US$44 million to holders of Catlin Bermuda's non-cumulative perpetual preferred shares (2012: US$44 million), net income available to common stockholders increased by 29 per cent to US$392 million (2012: US$305 million). The return on net tangible assets was 17.0 per cent (2012: 14.6 per cent); the return on equity was 13.4 per cent (2012: 11.3 per cent).

Comprehensive income to common stockholders amounted to US$386 million (2012: US$337 million) and is analysed in the table below.

Statements of comprehensive income (US$m)

	2013	2012
Net income to common stockholders	392	305
Other comprehensive income/(loss)
Translation adjustments	(6)	30
Defined benefit pension plan	-	2
Total other comprehensive income/(loss)	(6)	32
Comprehensive income to common stockholders	386	337

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

Balance sheet

A summary of the Consolidated Balance Sheets at 31 December 2013 and 2012 appears in the table below.

Summary of Consolidated Balance Sheets (US$m)

	2013	2012	% change
Investments and cash	9,217	8,774	5%
Intangible assets and goodwill	720	720	-
Premiums and other receivables	1,845	1,838	-
Reinsurance recoverable	1,480	1,503	(2%)
Deferred policy acquisition costs	490	464	6%
Other assets	842	742	13%
Loss reserves	(6,709)	(6,686)	-
Unearned premiums	(2,728)	(2,552)	7%
Subordinated debt	(93)	(92)	1%
Reinsurance payable	(729)	(600)	22%
Other liabilities	(552)	(599)	(9%)
Stockholders' equity	3,783	3,512	8%

The major items are analysed below.

Investments and cash

Investments and cash increased by 5 per cent to US$9.22 billion (2012: US$8.77 billion). The increase is driven by cash flows from the Group's insurance operations and positive investment performance.

Intangible assets and goodwill

The table below sets out the principal components of these assets.

Intangible assets and goodwill (US$m)

	2013	2012
Purchased Lloyd's syndicate capacity	634	634
Surplus lines licenses	6	6
Goodwill on acquisition of Wellington Underwriting plc	63	63
Other goodwill	17	17
Intangible assets and goodwill	720	720
Associated deferred tax (included within other liabilities)	(92)	(103)
Intangible assets and goodwill net of deferred tax	628	617

Premiums and other receivables

Premiums and other receivables amounting to US$1.85 billion were broadly flat (2012: US$1.84 billion). The growth in gross premiums written occurred earlier during 2013, thereby affecting the year-on-year comparison.  

Reinsurance recoverable

Amounts receivable from reinsurers decreased by 2 per cent to US$1.48 billion (2012: US$1.50 billion). Reinsurance recoverables represent 39 per cent of stockholders' equity (2012: 43 per cent). All current reinsurers have a financial strength rating of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral.

Deferred policy acquisition costs

Deferred policy acquisition costs represented 22 per cent of unearned premiums, net of reinsurance, at 31 December 2013 (2012: 22 per cent).

Loss reserves

Gross loss reserves remain broadly unchanged in 2013 at US$6.71 billion (2012: US$6.69 billion). Approximately 95 per cent of net reserves relate to the 2003 and later accident years. The Group released US$167 million from prior year loss reserves during 2013, an amount equal to approximately 3 per cent of opening net reserves (2012: US$139 million or 3 per cent).

Unearned premiums

Unearned premiums increased by 7 per cent to US$2.73 billion (2012: US$2.55 billion).  The increase in unearned premiums is the result of the growth in gross premiums written.

Notes payable and subordinated debt

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

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

Reinsurance payable

Reinsurance payable has increased by 22 per cent to US$729 million (2012: US$600 million), primarily due to premiums ceded to the SPS, which are on a funds withheld basis.

Total stockholders' equity

The table below shows the principal components of the change in total stockholders' equity during 2013 and 2012:

Change in total stockholders' equity (US$m)

	2013	2012
Total stockholders' equity, 1 January	3,512	3,298
Net income	436	349
Other comprehensive income/(loss)	(6)	32
Common share dividends	(166)	(157)
Non-controlling preferred stock dividends	(44)	(44)
Stock compensation and other	51	34
Total stockholders' equity, 31 December	3,783	3,512

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

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

Net tangible assets (US$m)

	2013	2012
Total stockholders' equity	3,783	3,512
Less: attributable to non-controlling preferred stock	(590)	(590)
Total common stockholders' equity	3,193	2,922
Less: intangible assets, net of tax	(628)	(617)
Net tangible assets	2,565	2,305
Book value per share (US$)	$8.92	$8.32
Book value per share (sterling)	£5.37	£5.14
Net tangible assets per share (US$)	$7.17	$6.56
Net tangible assets per share (sterling)	£4.32	£4.05

Capital

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

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

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

Catlin's rated underwriting entities have been assigned financial strength ratings of 'A' (Excellent) by A.M. Best and 'A' (Strong) by Standard & Poor's.  These superior ratings reflect the agencies' confidence in the Group's risk management framework and level of capital. Standard & Poor's during 2013 upgraded its opinion of Catlin's Enterprise Risk Management programme to 'Very Strong'.     

Shareholders' equity forms the backbone of the Group's capitalisation, complemented by the non-cumulative perpetual preferred shares issued by Catlin Bermuda (Catlin Insurance Company Ltd.). The preferred shares are a capital instrument which is eligible as regulatory capital for Catlin Bermuda. In addition, the Group has put in place several strategic third-party capital arrangements.  Catlin's centrally managed outwards reinsurance/risk transfer programme reduces volatility and further enhances overall capital efficiency.

Available capital

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

The Group's capital position at 31 December 2013 and 2012 is analysed in the table below.

Capital position (US$m)

	2013	2012
Paid-up capital (net of intangibles)	2,565	2,305
Catlin Bermuda preferred shares	590	590
Available capital	3,155	2,895
Required economic capital1	2,612	2,539
Capital buffer to required economic capital	543	356
Capital buffer as % of required economic capital	21%	14%
Additional resources not included in calculation of available capital
Subordinated debt	93	92
Undrawn bank facilities	302	391

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

The Group strives generally to maintain a buffer of available capital that is between 10 per cent and 20 per cent of required economic capital. There may, however, be periods when the capital buffer falls outside this range over a short-term period as the Group manages uncertainty and explores opportunities.

Management's estimate of required economic capital is based on a portfolio view of risk, rather than singular events.  It takes into account all types of risks - underwriting risk, reserving risk, financial markets risk, credit risk and operational risk - that are faced by the Group. The required economic capital is set at a level that would allow Catlin to continue to trade forward following a 1-in-100-year 'portfolio' event (which could include a combination of all of the types of risks listed above) and to benefit from the improved pricing environment in subsequent years following extreme market losses, without necessarily raising capital.

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

Third-party capital

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

Special Purpose Syndicates to provide whole-account quota share reinsurance to Catlin Syndicate 2003 were first established at Lloyd's during 2012. That programme was expanded for 2013 and again for 2014. 

Also for 2014, the Group has established a Portfolio Participation Vehicle ('PPV') that provides whole-account reinsurance protection for all of the Group's non-Syndicate business. Several third-party capital providers have subscribed to the PPV.

Combined, sponsors of the Special Purpose Syndicates and the PPV have put up nearly US$300 million in capital for 2014.

The Group recognised US$28 million in commissions and fees in 2013 relating to the Special Purpose Syndicates (2012: US$14 million).

The Group has in place an Adverse Development Cover that provides protection against significant deterioration, under certain circumstances and subject to limits, of loss reserves relating to the Group's 2011 and prior underwriting years. The purchase of this coverage does not represent a change in the Group's reserving philosophy, but rather is intended to improve the efficiency of the Group's capital base.

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

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

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

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

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

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

The premiums ceded to third-party capital providers are included in reinsurance premiums ceded in the Group's Consolidated Statements of Operations.

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

Regulatory requirements

Catlin is committed to full compliance with Group and local regulatory requirements in all relevant jurisdictions in which we operate and has implemented Group-wide 'Own Risk and Solvency Assessments' ('ORSA').

Reinsurance and risk transfer

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

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

The key elements of the risk transfer programme include:

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

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

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

·    consideration of the quality of security and willingness to pay

As part of its risk transfer programme, the Group has established a Catastrophe Aggregate Programme, which is structured to protect the Group against an aggregation of significant catastrophe losses (with a focus on natural perils) from major zones. Once the aggregate of losses to the Group reaches a certain level, a significant portion of further losses are recoverable from the programme up to certain limits. The Catastrophe Aggregate Programme was first triggered in 2011 following the unprecedented series of major catastrophe events, although similar structures have been in place for prior years. The 2013 programme is not expected to be triggered from events during 2013.

The core risk transfer programme structure is reviewed at least annually and could change materially in future years. The actual structure will depend on market availability and a consideration of the cost and benefits afforded by the programme. The overall 2014 programme provides similar levels of protection relative to gross exposures compared with recent years.

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

The Group actively considers and monitors the insurance-linked securities market and may sponsor such transactions when appropriate. During 2013, the Group sponsored a catastrophe bond, Galileo Re Ltd., that provides annual aggregate protection for US windstorm, US earthquake, Canadian earthquake and European windstorm.

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

Aggregate management

Catlin underwrites classes of catastrophe-exposed business. The Group uses sophisticated modelling tools to manage its most significant potential catastrophe threats from natural or man-made events.

Accumulation of risk is monitored and controlled against risk appetite limits in compliance with policy and procedures approved by the Group Board of Directors. A selection of modelled outcomes for the Group's most significant catastrophe threat scenarios is detailed below. The modelled outcomes represent the Group's modelled net loss after allowing for all reinsurances and are shown in the table below. This output is used to monitor the Group's risk appetite, as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and as a key consideration in the assessment of required capital.

Examples of catastrophe threat scenarios

Outcomes derived as at 1 October 2013 on a single loss basis (i.e. net losses for individual threat scenarios are not additive)

US$m	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000
Catlin Group
Gross loss	859	980	1,240	654	475
Reinsurance effect	(463)	(565)	(1,017)	(164)	(145)
Modelled net loss	396	415	223	490	330
Modelled net loss as a percentage of available capital1	14%	14%	8%	17%	11%

1 Available capital amounted to US$2.9 billion at 30 June 2013.

Limitations

The modelled outcomes in the table above are mean losses from a range of potential outcomes.  Significant variance around the mean is possible. Catlin understands that modelling is an inexact science and undertakes mitigating actions against this model uncertainty. Modelling is used to inform and complement the views of both underwriting and actuarial teams.

Investments

Total return on Catlin's average cash and investments of US$8.86 billion during 2013 amounted to 1.5 per cent (2012: 2.0 per cent). Total investment return amounted to US$135 million (2012: US$173 million), above the Group's expectations given the rise in interest rates over the year.

The Group's investment portfolio benefited from strong gains on other assets, in particular from in-house managed risk mandates.  The Group reduced fixed income duration during the second half of 2013, which partially mitigated the impact from the rising rate environment. As a result, total return from fixed maturities was roughly flat. The Group also continued to protect the investment portfolio against extreme credit events and equity market volatility through the use of overlays. 

Investment performance

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

Contribution to total investment return (US$m)

	2013	2012
Interest income	127	138
Net gains (losses) on fixed income and short-term investments	(94)	48
Net gains on other invested assets	102	(13)
Total investment return	135	173

Investment performance in 2013 is analysed by major asset category in the table below.

Investment performance by major asset category (US$m)

US$m	Allocation at 31 Dec 2013	Average Allocation during period	Average Allocation during period %	Total return	Total return %
Fixed income	6,054	5,689	65%	(9)	(0.1%)
Cash & short-term investments	2,475	2,600	29%	18	0.7%
Other invested assets	688	569	6%	126	22.1%
Total	9,217	8,858	100%	135	1.5%

The return on the fixed income portfolio reflects net losses resulting from increases in interest rates over the course of 2013. These losses were largely offset by interest income and positive returns from tactical fixed income portfolios, which benefited from spreads tightening over the year. The return is stated net of performance on overlays.

The return on the other invested assets reflects strong gains from in-house-managed risk assets, primarily special situations equities and select private equity investments. During the year the Group increased its exposure to equities and loans, whilst opportunistically reducing its exposure to third-party fixed income tactical mandates.

Portfolio management and positioning

Catlin's total cash and investments increased by 5 per cent during 2013 to US$9.22 billion (2012: US$8.77 billion).

The Group's investment team now comprises 20 professionals who, together with systems and processes implemented in recent years, enable Catlin to manage all US dollar core investment portfolios in-house. Non-US dollar core portfolios were being managed by a small number of external managers.

At 31 December 2013, US$4.4 billion of fixed income securities were managed by the in-house core team, whilst US$153 million in assets were under management with specialist third-party tactical fixed income managers. Other invested assets comprise US$688 million mainly relating to direct investments in equities and loans managed by the in-house special situations team as well as private equity funds and co-investments with select investment partners. These assets also include US$22 million of hedge funds for which redemption notices have been issued.

Given the increased market volatility around central banks' exit from accommodative policies, the Group reduced its exposure to US Government securities, agency securities and agency mortgage-backed securities to 12 per cent of cash and investments (2012: 18 per cent). Exposure to short-dated AAA asset-backed securities was increased during the year to 11 per cent of cash and investments (2012: 8 per cent) as these securities offered better relative value. 

Opportunities to make investments with a longer-term horizon, capture liquidity premium and benefit from dislocations were identified during the year by the in-house special situations team. Investments were made in selected equities and loans, which generated a return of 24 per cent in 2013.

The Group's investment portfolio remains liquid and conservatively positioned. Cash, cash equivalents and short-term investments accounted for 27 per cent of the portfolio at 31 December 2013 (2012: 30 per cent). Fifty-one per cent of these investments is held in money market funds and short-term bonds, 33 per cent is held in bank deposits, and the remainder is managed by Lloyd's in respect of regulatory overseas deposits.  

Liquid assets - which are defined as cash, government securities and fixed income securities with less than six months until maturity - accounted for 52 per cent of the portfolio (2012: 57 per cent).

A breakdown of the investment portfolio by sector is shown in the table below.

Detailed asset allocation (%)

	2013	2012
Fixed income investments
US government and agency securities	6%	9%
Non-US government and agency securities	18%	17%
Agency mortgage-backed securities	6%	9%
Asset-backed securities	11%	8%
Covered bonds	6%	5%
Corporate bonds	17%	15%
Commercial mortgage-backed securities	1%	1%
Non-agency mortgage-backed securities	1%	*
	66%	64%
Cash and short-term investments	27%	30%
Other invested assets	7%	6%
Total	100%	100%

*Less than 0.5 per cent

Asset quality

Catlin's fixed income portfolio at 31 December 2013 consisted of high-quality assets, with 97 per cent of the portfolio invested in government/agency securities or instruments rated 'A' or higher (2012: 97 per cent).  The quality of the Group's fixed income portfolio is analysed in the table below.

Fixed income investments by rating at 31 December 2013 (%)

	Government/ agency	AAA	AA	A	BBB	Non- investment grade	Assets US$m
US government/agencies	10%	-	-	-	-	-	578
Non-US government/ agencies	27%	-	-	-	-	-	1,627
Agency mortgage-backed securities	9%	-	-	-	-	-	545
Asset-backed securities	-	16%	*	*	-	1%	1,040
Non-agency mortgage-backed securities	-	*	-	-	-	*	41
Commercial mortgage backed securities	-	-	*	-	-	1%	59
Covered bonds	-	9%	-	-	-	-	555
Corporate bonds	-	1%	13%	12%	*	1%	1,606
Total	46%	26%	13%	12%	*	3%	6,051

*  Less than 0.5 per cent

The Group does not have any direct exposure to Portugal, Italy, Ireland, Greece and Spain in its investment portfolio and its exposure to emerging markets at 31 December 2013 was insignificant.

Duration positioning

The duration of the Group's insurance liabilities was 3.1 years at 31 December 2013, which resulted in a liability benchmark duration (including shareholders' funds and new business cash flows) of 2.7 years or US$2.4 million in DV01 (change in value for a 1 basis point parallel shift in interest rates). Given the expectation of further rates rises, the Group actively managed duration over the year primarily by using interest rate swaps. The fixed income portfolio duration at 31 December 2013 was 1.5 years (2012: 2.4 years). The duration of total cash and investments was 1.1 years (2012: 1.7 years) or US$1.0m in DV01. The Group continues to remain short of the liability benchmark in the expectation that interest rates will rise.

The yield to maturity on the fixed income portfolio was 1.5 per cent at 31 December 2013 (2012: 1.2 per cent).

Investment strategy

The Group's investment portfolio at 31 December 2013 reflects the investment strategy that was initiated during 2010. The objective of the investment function is to create economic value for the Group whilst managing earnings risk and maintaining appropriate liquidity levels to meet claims and expenses. The investment strategy operates within a comprehensive market risk framework that is based on capital, liquidity and risk-adjusted returns and is independently overseen by Catlin's Enterprise Risk Management team.

Under this strategy, a significant majority of Catlin's investments comprise a core portfolio of highly rated sovereign, agency and corporate bonds and AAA-rated short-duration asset-backed securities. The core portfolio is aligned with the profile of the Group's liabilities and managed by the in-house team and a select group of external managers. Ninety-five per cent of fixed income investments were managed under the Group's core investment guidelines at 31 December 2013.

The Group will continue to build up the in-house special situations portfolio and select private equity investments that leverage the Group's high levels of liquidity and its balance sheet capacity to invest with a longer-term horizon, capture liquidity premium and benefit from dislocations.

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

Investment outlook

Catlin's investment strategy will continue to focus on capital preservation. The Group expects a continued improvement in economic fundamentals and positive risk asset sentiment, resulting in a rising rate environment and market volatility as central banks attempt to manage their exit from accommodative policies.

The total return on fixed maturities will remain challenged in 2014 given rising rate expectations. With the established in-house core management capabilities, we are well positioned to actively manage duration positioning and sector composition, depending on market developments. The Group is expected to benefit from higher rates as the economic value of the Group's liabilities would reduce by more than the reduction in value of its fixed income investments, given the shorter asset duration.

The Group has established a strong platform to continue investing in attractive opportunities in the special situations and private equity space while actively managing macro-economic risks. The Group will also continue to build on its successful cooperation with a small group of third-party specialist managers in selected sectors and asset markets as risk/reward opportunities arise.

Loss Reserve Development

Catlin adopts a consistent reserving philosophy from year-to-year, taking into account 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 major events

·      movements in industry benchmarks

·      the incidence of incurred claims

·      the extent to which all claims have been reported

·      changes in the legal environment

·      damage awards

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

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

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

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

Estimate of reinsurance recoveries

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

Development of reserves for losses and loss expenses

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

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

All historic premium and claim amounts have been restated using exchange rates as at 31 December 2013 for the Group's functional currencies to remove the distorting effect of changing rates of exchange as far as possible.

Wellington acquisition

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

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

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

Highlights

In aggregate, across most accident years, reserves have developed slightly better than the assessments made at the previous year-end. The reserves from the 2003 and prior accident years represent 4 per cent of the Group's net reserves at 31 December 2013.

A summary of the Group's net reserves is shown in the table below.

Summary of Catlin Group net reserves at 31 December 2013 (US$m)

Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	% of total net reserves
2003 and prior	82	113	195	4%
2004	27	37	64	1%
2005	35	49	84	2%
2006	37	50	87	2%
2007	158	18	176	3%
2008	205	3	207	4%
2009	522	-	522	10%
2010	568	-	568	11%
2011	707	-	707	13%
2012	1,037	-	1,037	19%
2013	1,663	-	1,663	31%
Sub-total	5,040	270	5,310	99%
Other net reserves1			63	1%
Total net reserves			5,373	100%

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

Commentary on development tables

·      Non-major events: Improvements on Wellington are due to reductions in Aerospace, Casualty Treaty and Motor XL. The 2009, 2010, 2011 and 2012 accident years have improved due to better than expected experience across Casualty, Aerospace and Energy and Marine product groups.

·      Major events: The deterioration on 2012 is due to increases in Costa Concordia and Hurricane Sandy. The improvement on 2011 major events is driven by reductions on Hurricane Irene, the Japan Earthquake and the Thai Floods.

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

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

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

Events included in the major events sections of loss development triangles

Accident year	Event
2002 & prior	World Trade Centre/US Terrorism 9/11
2004	Hurricane Charley Hurricane Frances Hurricane Ivan Hurricane Jeanne
2005	Hurricane Katrina Hurricane Rita Hurricane Wilma
2008	Hurricane Ike
2010	Chilean Earthquake Deepwater Horizon New Zealand Earthquake Australian Floods, Central Queensland
2011	Australian Floods, Brisbane New Zealand Earthquake Japanese Earthquake Tuscaloosa Tornadoes Joplin Tornadoes New Zealand Summer Earthquake Hurricane Irene Danish Cloudburst Thai Floods
2012	Costa Concordia Windstorm Sandy
2013	Central European Floods Calgary Floods German Hailstorms Other Catastrophe Events Less Than US$25 Million

Development tables
Estimated ultimate net losses (US$m)

									Accident year
	Wellington accident periods 2006 and prior				2003 & prior		2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	Total
Net premiums earned							1,183	1,214	1,348	2,749	2,566	2,937	3,231	3,612	3,604	3,948
Net ultimate excluding major events
Initial estimate1		6,018			2,004		557	605	646	1,393	1,561	1,831	1,692	1,842	1,837	2,082
One year later		5,986			2,006		491	544	604	1,448	1,537	1,800	1,669	1,865	1,813
Two years later		5,896			1,991		468	501	589	1,429	1,536	1,782	1,613	1,823
Three years later		5,880			2,033		441	479	575	1,420	1,513	1,747	1,552
Four years later		5,791			2,037		430	475	568	1,425	1,501	1,696
Five years later		5,780			2,036		436	468	569	1,418	1,496
Six years later		5,717			2,053		426	471	566	1,425
Seven years later		5,670			2,033		421	466	563
Eight years later					2,027		415	460
Nine years later					2,007		412
Ten years later					2,007
Net ultimate loss ratio excluding major events
Initial estimate1							47.1%	49.8%	47.9%	50.7%	60.8%	62.3%	52.4%	51.0%	51.0%	52.7%
One year later							41.5%	44.8%	44.8%	52.7%	59.9%	61.3%	51.7%	51.6%	50.3%
Two years later							39.6%	41.3%	43.7%	52.0%	59.9%	60.7%	49.9%	50.5%
Three years later							37.3%	39.5%	42.7%	51.7%	59.0%	59.5%	48.0%
Four years later							36.3%	39.1%	42.1%	51.8%	58.5%	57.7%
Five years later							36.9%	38.6%	42.2%	51.6%	58.3%
Six years later							36.0%	38.8%	42.0%	51.8%
Seven years later							35.6%	38.4%	41.8%
Eight years later							35.1%	37.9%
Nine years later							34.8%
Ten years later
Net ultimate major events
Initial estimate1					20		116	334			274		291	789	310	169
One year later					20		117	386			286		287	813	388
Two years later					19		118	397			288		301	770
Three years later					19		117	401			284		317
Four years later					20		121	394			285
Five years later					28		120	412			294
Six years later					25		120	409
Seven years later					19		120	414
Eight years later					17		120	422
Nine years later					20		120
Ten years later					20
Net ultimate including major events
Initial estimate1		6,018			2,024		673	939	646	1,393	1,835	1,831	1,983	2,631	2,147	2,251
One year later		5,986			2,026		608	930	604	1,448	1,823	1,800	1,956	2,678	2,201
Two years later		5,896			2,010		586	898	589	1,429	1,824	1,782	1,914	2,593
Three years later		5,880			2,052		558	880	575	1,420	1,797	1,747	1,869
Four years later		5,791			2,057		551	869	568	1,425	1,786	1,696
Five years later		5,780			2,064		556	880	569	1,418	1,790
Six years later		5,717			2,078		546	880	566	1,425
Seven years later		5,670			2,052		541	880	563
Eight years later					2,044		535	882
Nine years later					2,027		532
Ten years later					2,027
Net ultimate loss ratio including major events
Initial estimate1							56.9%	77.3%	47.9%	50.7%	71.5%	62.3%	61.4%	72.8%	59.6%	57.0%
One year later							51.4%	76.6%	44.8%	52.7%	71.0%	61.3%	60.5%	74.1%	61.1%
Two years later							49.5%	74.0%	43.7%	52.0%	71.1%	60.7%	59.2%	71.8%
Three years later							47.2%	72.5%	42.7%	51.7%	70.0%	59.5%	57.8%
Four years later							46.6%	71.6%	42.1%	51.8%	69.6%	57.7%
Five years later							47.0%	72.5%	42.2%	51.6%	69.8%
Six years later							46.2%	72.5%	42.0%	51.8%
Seven years later							45.7%	72.5%	41.8%
Eight years later							45.2%	72.7%
Nine years later							45.0%
Ten years later
Cumulative net paid			5,421		1,945		505	847	526	1,249	1,583	1,174	1,301	1,886	1,164	588	18,188
Estimated net ultimate claims			5,670		2,027		532	882	563	1,425	1,790	1,696	1,869	2,593	2,201	2,251	23,498
Estimated net claim reserves				249	82		27	35	37	176	207	522	568	707	1,037	1,663	5,310
Other net reserves2																	63
Booked reserves																	5,373

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

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

Net paid losses (US$m) 

		Accident Year
	Wellington accident periods 2006 and prior	2003 and prior	2004	2005	2006	2007	2008	2009	2010	2011	2012		2013
Net premiums earned			1,183	1,214	1,348	2,749	2,566	2,937	3,231	3,612	3,604		3,948
Net paid excluding major events
End of accident year1	3,841	1,204	129	122	159	358	318	368	413	459	507		559
One year later	4,198	1,410	227	230	272	596	688	716	723	926	975
Two years later	4,650	1,561	286	294	362	889	960	932	937	1,221
Three years later	5,018	1,646	319	351	424	1,040	1,071	1,110	1,068
Four years later	5,201	1,734	343	381	464	1,135	1,195	1,174
Five years later	5,320	1,795	361	398	494	1,193	1,277
Six years later	5,362	1,838	373	415	514	1,249
Seven years later	5,421	1,873	382	414	526
Eight years later		1,909	384	425
Nine years later		1,910	385
Ten years later		1,926
Net paid loss ratio excluding major events
End of accident year1			10.9%	10.0%	11.8%	13.0%	12.4%	12.5%	12.8%	12.7%	14.1%		14.2%
One year later			19.2%	18.9%	20.2%	21.7%	26.8%	24.4%	22.4%	25.6%	27.1%
Two years later			24.2%	24.2%	26.9%	32.3%	37.4%	31.7%	29.0%	33.8%
Three years later			27.0%	28.9%	31.5%	37.8%	41.7%	37.8%	33.1%
Four years later			29.0%	31.4%	34.4%	41.3%	46.6%	40.0%
Five years later			30.5%	32.8%	36.6%	43.4%	49.8%
Six years later			31.5%	34.2%	38.1%	45.4%
Seven years later			32.3%	34.1%	39.0%
Eight years later			32.5%	35.0%
Nine years later			32.5%
Ten years later
Net paid major events
End of accident year1		8	72	94			101		82	286	49		29
One year later		13	113	248			193		160	643	189
Two years later		15	116	347			251		198	665
Three years later		19	117	378			273		233
Four years later		19	119	394			300
Five years later		21	120	399			306
Six years later		21	120	402
Seven years later		20	120	405
Eight years later		17	120	422
Nine years later		19	120
Ten years later		19
Net paid including major events
End of accident year1	3,841	1,212	201	216	159	358	419	368	495	745	556		588
One year later	4,198	1,423	340	478	272	596	881	716	883	1,569	1,164
Two years later	4,650	1,576	402	641	362	889	1,211	932	1,135	1,886
Three years later	5,018	1,665	436	729	424	1,040	1,344	1,110	1,301
Four years later	5,201	1,753	462	775	464	1,135	1,495	1,174
Five years later	5,320	1,816	481	797	494	1,193	1,583
Six years later	5,362	1,859	493	817	514	1,249
Seven years later	5,421	1,893	502	819	526
Eight years later		1,926	504	847
Nine years later		1,929	505
Ten years later		1,945
Net paid loss ratio including major events
End of accident year1			17.0%	17.8%	11.8%	13.0%	16.3%	12.5%	15.3%	20.6%	15.4%		14.9%
One year later			28.7%	39.4%	20.2%	21.7%	34.3%	24.4%	27.3%	43.4%	32.3%
Two years later			34.0%	52.8%	26.9%	32.3%	47.2%	31.7%	35.1%	52.2%
Three years later			36.9%	60.0%	31.5%	37.8%	52.4%	37.8%	40.3%
Four years later			39.1%	63.8%	34.4%	41.3%	58.3%	40.0%
Five years later			40.7%	65.7%	36.6%	43.4%	61.7%
Six years later			41.7%	67.3%	38.1%	45.4%
Seven years later			42.4%	67.5%	39.0%
Eight years later			42.6%	69.8%
Nine years later			42.7%
Ten years later

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

Catlin Group Limited

Consolidated Balance Sheets

As at 31 December 2013 and 2012

(US dollars in millions)

	2013	2012
Assets
Investments Fixed maturities, at fair value	$6,054	$5,603
Short-term investments, at fair value	184	123
Other invested assets	688	574
Total investments	6,926	6,300
Cash and cash equivalents	2,291	2,474
Accrued investment income	39	37
Premiums and other receivables	1,845	1,838
Reinsurance recoverable on unpaid losses (net of bad debts)	1,336	1,400
Reinsurance recoverable on paid losses (net of bad debts)	144	103
Reinsurers' share of unearned premiums	529	466
Deferred policy acquisition costs	490	464
Intangible assets and goodwill	720	720
Unsettled trades receivable	51	4
Other assets	223	235
Total assets	$14,594	$14,041
Liabilities and stockholders' equity
Liabilities
Reserves for losses and loss expenses	$6,709	$6,686
Unearned premiums	2,728	2,552
Reinsurance payable	729	600
Accounts payable and other liabilities	353	371
Subordinated debt	93	92
Unsettled trades payable	59	43
Deferred tax liability (net)	140	185
Total liabilities	$10,811	$10,529

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

	2013	2012
Stockholders' equity
Common stock	$4	$4
Additional paid-in capital	1,976	1,961
Treasury stock	(37)	(73)
Accumulated other comprehensive loss	(200)	(194)
Retained earnings	1,450	1,224
Total common stockholders' equity	3,193	2,922
Non-controlling interest in preferred stock of consolidated subsidiary	590	590
Total stockholders' equity	3,783	3,512
Total liabilities and stockholders' equity	$14,594	$14,041

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

Approved by the Board of Directors on 7 February 2014.

Stephen Catlin

Director

Benjamin Meuli

Director

Catlin Group Limited

Consolidated Income Statements

For the years ended 31 December 2013 and 2012

(US dollars in millions, except per share amounts)

	2013	2012
Revenues
Gross premiums written	$5,309	$4,972
Reinsurance premiums ceded	(1,257)	(1,138)
Net premiums written	4,052	3,834
Change in net unearned premiums	(104)	(230)
Net premiums earned	3,948	3,604
Net investment return	124	158
Net losses on foreign currency	(26)	(15)
Other income	11	8
Total revenues	4,057	3,755
Expenses
Losses and loss expenses	2,063	2,020
Policy acquisition costs	882	796
Administrative and other expenses	661	586
Financing costs	19	14
Total expenses	3,625	3,416
Net income before income tax	432	339
Income tax benefit	4	10
Net income	436	349
Non-controlling preferred stock dividend	(44)	(44)
Net income to common stockholders	$392	$305
Earnings per common share
Basic	$1.11	$0.88
Diluted	$1.03	$0.83

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

Catlin Group Limited

Consolidated Statements of Comprehensive Income

For the years ended 31 December 2013 and 2012

(US dollars in millions, except per share amounts)

	2013	2012
Net income to common stockholders	$392	$305
Other comprehensive (loss)/income, net of tax
Translation adjustments	(6)	30
Defined benefit pension plan	-	2
Total other comprehensive (loss)/income	(6)	32
Comprehensive income to common stockholders	$386	$337

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

Catlin Group Limited

Consolidated Statements of Changes in Stockholders' Equity

For the years ended 31 December 2013 and 2012

(US dollars in millions)

	Common stock	Additional paid-in capital	Treasury stock	Accumulated other comprehensive loss	Retained earnings	Non-controlling preferred stock	Total stockholders' equity
Balance 1 January 2012	$4	$1,959	$(105)	$(226)	$1,076	$590	$3,298
Net income to common stockholders	-	-	-	-	305	-	305
Other comprehensive income	-	-	-	32	-	-	32
Stock compensation expense	-	29	-	-	-	-	29
Stock options exercised	-	3	-	-	-	-	3
Dividends	-	-	-	-	(157)	-	(157)
Distribution of treasury stock held in Employee Benefit Trust	-	(30)	32	-	-	-	2
Balance 31 December 2012	$4	$1,961	$(73)	$(194)	$1,224	$590	$3,512
Net income to common stockholders	-	-	-	-	392	-	392
Other comprehensive loss	-	-	-	(6)	-	-	(6)
Stock compensation expense	-	50	-	-	-	-	50
Stock options exercised	-	1	-	-	-	-	1
Dividends	-	-	-	-	(166)	-	(166)
Distribution of treasury stock held in Employee Benefit Trust	-	(36)	36	-	-	-	-
Balance 31 December 2013	$4	$1,976	$(37)	$(200)	$1,450	$590	$3,783

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

Catlin Group Limited

Consolidated Statements of Cash Flows

For the years ended 31 December 2013 and 2012

(US dollars in millions)

	2013	2012
Cash flows provided by operating activities
Net income	$436	$349
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	22	19
Amortisation of net discounts of fixed maturities	46	57
Net gains on investments	(8)	(34)
Changes in operating assets and liabilities:
Reserves for losses and loss expenses	(10)	137
Unearned premiums	163	407
Premiums and other receivables	32	(147)
Deferred policy acquisition costs	(59)	(61)
Reinsurance recoverable on unpaid losses	71	(197)
Reinsurance recoverable on paid losses	(40)	(73)
Reinsurers' share of unearned premiums	(61)	(174)
Reinsurance payable	78	176
Accounts payable and other liabilities	76	49
Deferred taxes	(40)	(15)
Other	81	72
Net cash flows provided by operating activities	787	565
Cash flows used in investing activities
Purchases of fixed maturities	(4,181)	(5,822)
Proceeds from sales of fixed maturities	3,416	5,967
Proceeds from maturities of fixed maturities	206	314
Net purchases, sales and maturities of short-term investments	(64)	(8)
Purchases of other invested assets	(725)	(652)
Proceeds from the sales and redemptions of other invested assets	714	244
Net purchases and sales of property and equipment	(66)	(39)
Net cash flows (used in)/provided by investing activities	(700)	4

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

	2013	2012
Cash flows used in financing activities
Dividends paid on common stock	(166)	(157)
Dividends paid on non-controlling preferred stock	(44)	(44)
Net cash flows used in financing activities	(210)	(201)
Net (decrease)/increase in cash and cash equivalents	(123)	368
Effect of exchange rate changes	(60)	43
Cash and cash equivalents - beginning of year	2,474	2,063
Cash and cash equivalents - end of year	$2,291	$2,474
Supplemental cash flow information
Taxes paid	$19	$7
Interest paid	$4	$4
Cash and cash equivalents comprise the following:
Cash at bank and in hand	$691	$1,298
Cash equivalents	$1,600	$1,176

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

Catlin Group Limited

Notes to the Consolidated Financial Statements

For the years ended 31 December 2013 and 2012

1   Nature of operations

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

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

The Group writes a broad range of products, including property, casualty, energy, marine and aerospace insurance and property, catastrophe and per-risk excess, non-proportional treaty, aviation, marine, casualty and motor reinsurance business. Risks are insured worldwide, although risks originating in the United States predominate. The Group currently operates from more than 50 offices in more than 20 countries.

2   Significant accounting policies

Basis of presentation

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

The Consolidated Income Statements reflect certain out-of-period adjustments, without which the 2013 net income to common stockholders would be increased by $17 million (2012: reduced by $8 million). The impact of these items, which include an adjustment to incurred losses in 2012 as described in Note 7, are not material to 2013 or 2012. Certain insignificant reclassifications have been made to prior year amounts to conform to the 2013 presentation. There is no impact of these reclassifications on net income or stockholders' equity.

Principles of consolidation

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

Reporting currency

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

Fixed maturities and short-term investments

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

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

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

Other invested assets

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

Derivatives

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

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

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

Cash and cash equivalents

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

Securities lending

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

Premiums

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

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

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

Policy acquisition costs

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

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

Reserves for losses and loss expenses

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

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

Reinsurance

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

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

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

Retroactive reinsurance

Catlin has purchased an Adverse Development Cover ('ADC') that, subject to limits, provided protection during 2013 against the deterioration of loss reserves relating to the Group's 2010 and prior underwriting years. This coverage is accounted for as retroactive reinsurance, which is reinsurance where the cedant is reimbursed for liabilities incurred as a result of past insurable events. Net costs of the ADC are recognised immediately as reinsurance premiums ceded in the Consolidated Income Statements. Any net gains that arise as a result of subsequent covered adverse development are deferred and amortised into income over the settlement period of the recoveries under the relevant contract.

Intangible assets and goodwill

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

Purchased syndicate capacity and admitted licenses are considered to have an indefinite life and as such are subject to annual impairment testing.

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

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

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

Other assets

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

Comprehensive income/(loss)

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

Foreign currency

Foreign currency translation

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

Foreign currency transactions

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

Income taxes

Income taxes have been provided for those operations that are subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Group's assets and liabilities. Such temporary differences are primarily due to the recognition of untaxed profits and intangible assets arising from the acquisition of Wellington Underwriting plc ('Wellington') in December 2006. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date.

A valuation allowance against deferred tax assets is recorded if it is more likely than not that all or some portion of the benefits related to deferred tax assets will not be realised.

Stock compensation

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

Treasury stock

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

Non-controlling interest in preferred stock

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

Warrants

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

Pensions

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

New accounting pronouncements

Effective 1 January 2013 the Group retrospectively adopted Financial Accounting Standards Board ('FASB') guidance requiring additional disclosures about financial instruments and derivative instruments that are either: (1) offset for balance sheet presentation purposes or (2) subject to an enforceable master netting agreement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. These disclosures apply only to derivatives, repurchase and reverse repurchase agreements and securities borrowing and securities lending transactions. The adoption of this guidance affects disclosure only and did not result in any impact on the Group's financial position or results of operations. The additional disclosures required are contained in Note 6 - Fair value measurement and Note 4 - Investments.

In July 2013 the FASB issued an accounting standard update requiring net presentation of certain unrecognised tax benefits and deferred tax assets, effective for years beginning after 15 December 2013. Early adoption is permitted. Where a deferred tax asset would be available to offset the potential cost of a tax position represented by an unrecognised tax benefit, the update requires the provision for this benefit to be presented as a reduction of the asset. The Group has prospectively adopted this accounting standard update, effective for the year ended 31 December 2013. The adoption of this standard did not result in any impact on the Group's financial position or results of operations.

3   Segmental information

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

The four reportable segments are:

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

·    Bermuda, which primarily underwrites reinsurance business;

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

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

At 31 December 2013 there were four significant intra-Group reinsurance contracts in place: a 52.5 per cent quota share, which cedes Catlin Syndicate 2003 at Lloyd's ('Catlin Syndicate') risk to Catlin Re Schweiz AG ('Catlin Re Switzerland'); a 75 per cent quota share contract, which cedes Catlin Insurance Company (UK) Limited ('Catlin UK') risk to Catlin Re Switzerland; a Whole Account Stop Loss contract, which cedes 7.5 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 82.5 per cent from the Catlin Syndicate to Catlin Re Switzerland; and a 75 per cent quota share contract, which cedes Catlin Inc. ('Catlin US') risk to Catlin Re Switzerland. Further quota share contracts were in place that ceded risk from 2010 and prior underwriting years to Catlin Insurance Company Ltd ('Catlin Bermuda'). The effects of each of these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

Net underwriting contribution by underwriting hub for the year ended 31 December 2013 is as follows:

(US dollars in millions)	London	Bermuda	US	International	Total
Gross premiums written	$2,474	$577	$1,213	$1,045	$5,309
Net premiums earned	1,832	486	858	772	3,948
Losses and loss expenses	(880)	(191)	(512)	(480)	(2,063)
Policy acquisition costs	(429)	(112)	(178)	(163)	(882)
Net underwriting contribution	$523	$183	$168	$129	$1,003

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

(US dollars in millions)	London	Bermuda	US	International	Total
Gross premiums written	$2,525	$523	$1,045	$879	$4,972
Net premiums earned	1,850	415	733	606	3,604
Losses and loss expenses	(896)	(215)	(505)	(404)	(2,020)
Policy acquisition costs	(429)	(98)	(140)	(129)	(796)
Net underwriting contribution	$525	$102	$88	$73	$788

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

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

4   Investments

Fixed maturities

The fair values of fixed maturities at 31 December 2013 and 2012 are as follows:

(US dollars in millions)	2013	2012
US government and agencies	$578	$807
Non-US governments	1,627	1,503
Corporate securities	2,161	1,727
Asset-backed securities	1,040	675
Mortgage-backed securities	645	892
Interest rate derivative contracts	6	(6)
Credit default derivative contracts	(3)	5
Total fixed maturities	$6,054	$5,603

$545 million (2012: $766 million) of the total mortgage-backed securities at 31 December 2013 is represented by investments in Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation and National Credit Union Administration bonds.

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

		2013		2012
(US dollars in millions)	Fair value	%	Fair value	%
US government and agencies	$578	10	$807	14
Non-US governments	1,627	27	1,503	27
AAA	1,571	26	1,132	20
AA	1,328	22	1,331	24
A	738	12	660	12
BBB and other	209	3	171	3
Interest rate derivative contracts	6	-	(6)	-
Credit default derivative contracts	(3)	-	5	-
Total fixed maturities	$6,054	100	$5,603	100

Fixed maturities at 31 December 2013 and 2012, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

(Fair value US dollars in millions)	2013	2012
Due in one year or less	$426	$415
Due after one through five years	2,915	2,699
Due after five years through ten years	883	829
Due after ten years	142	94
	4,366	4,037
Asset-backed securities	1,040	675
Mortgage-backed securities	645	892
Interest rate derivative contracts	6	(6)
Credit default derivative contracts	(3)	5
Total fixed maturities	$6,054	$5,603

The Group did not have an aggregate investment with a single counterparty in excess of 10 per cent of total investments at 31 December 2013 and 2012.

Other invested assets

Other invested assets by category at 31 December 2013 and 2012 are as follows:

(US dollars in millions)	2013	2012
Hedge funds	$22	$44
Equity funds	73	34
Equity securities	353	251
Loan instruments	199	212
Equity market derivative contracts	5	3
Other invested assets at fair value	652	544
Equity method investments	36	30
Total other invested assets	$688	$574

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

Equity funds are a portfolio comprising six individual private equity funds, three of which were entered into in 2011 and three in 2013. The equity funds have initial investment periods of up to five years.

Equity securities comprise $274 million of quoted equity securities, $33 million of quoted preferred equity securities and $46 million of private equity.

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

There are unfunded commitments related to investments in funds of $80 million as at 31 December 2013 (2012: $39 million).

Equity method investments comprise investments over which the Group exercises significant influence. These investments are accounted for using the equity method. At 31 December 2013, for the majority of the investments the Group owned between 22.5 per cent and 50.0 per cent interests in these entities. The share of profit on equity method investments included within the Consolidated Income Statements was $3 million (2012: $1 million). In management's opinion the fair value of these investments is not less than their carrying value.

Net investment return

The components of net investment return for the years ended 31 December 2013 and 2012 are as follows:

(US dollars in millions)	2013	2012
Investment income	$127	$138
Net (losses)/gains on fixed maturities and short-term investments	(94)	48
Net gains/(losses) on other invested assets	102	(13)
Total investment return	135	173
Investment expenses	(11)	(15)
Net investment return	$124	$158

The Group has elected to apply the fair value option to its fixed maturity securities and short-term investments. In 2013, net losses from fair value changes in these items were $94 million (2012: $48 million gain).

Losses in 2013 on fixed maturities and short-term investments still held at 31 December 2013 were $88 million (2012: $34 million gain). Gains in 2013 on other invested assets still held at 31 December 2013 were $34 million (2012: $15 million).

Restricted assets

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

The total value of these restricted assets by category at 31 December 2013 and 2012 is as follows:

(US dollars in millions)	2013	2012
Fixed maturities	$2,841	$3,038
Short-term investments	47	25
Cash and cash equivalents	735	915
Total restricted assets	$3,623	$3,978

Securities lending

The Group participates in a securities lending programme under which certain of its fixed maturity investments are loaned to third parties through a lending agent. Collateral in the form of cash, government securities and letters of credit is required at a minimum rate of 102 per cent of the market value of the loaned securities and is monitored and maintained by the lending agent. The Group had $9 million (2012: $9 million) of securities on loan at 31 December 2013.

5   Derivative financial instruments

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

Interest rate risk

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

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

Credit risk

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

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

Equity risk

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

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

Foreign exchange risk

During the period, the Group held various foreign currency derivatives to manage currency risk. Gains and losses on foreign exchange contracts are included in net gains/(losses) on foreign currency in the Consolidated Income Statements. Foreign exchange contracts' fair value is included in other assets on the Consolidated Balance Sheets.

Impact of derivatives

The fair values of derivatives at 31 December 2013 and 2012 are as follows:

			2013			2012
(US dollars in millions)	Gross  amount of recognised assets	Gross  amount  offset in the  balance sheet	Net amount in the  balance  sheet	Gross amount of recognised assets	Gross amount  offset in the balance sheet	Net amount  in the  balance sheet
Interest rate contracts	$15	$(9)	$6	$11	$(17)	$(6)
Credit default contracts	-	(3)	(3)	6	(1)	5
Equity market contracts	6	(1)	5	3	-	3
Foreign exchange contracts	1	-	1	-	-	-
Total derivatives	$22	$(13)	$9	$20	$(18)	$2

Cash collateral related to derivatives not offset in the balance sheet was $19 million at 31 December 2013 (2012: $2 million).

The notional values of open derivatives at 31 December 2013 and 2012 are as follows:

	Notional value
(US dollars in millions)	2013	2012
Interest rate options	$200	$2,300
Interest rate swap contracts	1,341	785
Credit default swap option contracts	1,100	600
Credit default swap contracts	33	71
Equity market option contracts	298	3
Equity market swap contracts	-	55
Foreign exchange contracts	17	8

The net gains/(losses) on derivatives at 31 December 2013 and 2012 are as follows:

(US dollars in millions)	2013	2012
Interest rate derivative contracts	$-	$(40)
Credit default derivative contracts	(13)	(10)
Equity market derivative contracts	5	(31)
Commodity market derivative contracts	-	1
Foreign exchange derivative contracts	(1)	(3)
Net losses on derivatives	$(9)	$(83)

The derivatives contracts held by the Group at 31 December 2013 contain no contingent features related to the Group's credit risk.

During 2013 derivatives were used in the investment portfolio to manage tail risks, modify duration positioning, and for efficient portfolio and risk capital management. The interest rate swaps were used to shorten duration and interest rate options were used to provide protection against the tail risk of large falls in interest rates. The credit default derivative contracts provided protections for the credit risk in our portfolio. Equity market derivative contracts were utilised both for tail risk protection and efficient portfolio management.

6   Fair value measurement

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

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

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

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

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

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

Assets utilising Level 3 inputs include: investments in funds with significant redemption restrictions; unquoted private equity and debt not qualifying as Level 2; collateralised debt obligations ('CDO'); and sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs reflect individual assumptions and judgements 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 judgement. Accordingly, the degree of judgement 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 2013 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

(US dollars in millions)	Balance as at 31 December 2013	Level 1 inputs	Level 2  inputs	Level 3  inputs
Assets
US government and agencies	$578	$105	$473	$-
Non-US governments	1,627	-	1,627	-
Corporate securities	2,161	-	2,151	10
RMBS	586	-	537	49
CMBS	59	-	47	12
ABS	1,040	-	1,012	28
Interest rate derivative contracts	6	-	6	-
Credit default derivative contracts	(3)	-	(3)	-
Total fixed maturities	6,054	105	5,850	99
Short-term investments	184	54	130	-
Other invested assets at fair value	652	308	187	157
Foreign exchange derivative contracts	1	-	1	-
Total assets at fair value	$6,891	$467	$6,168	$256

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

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

The changes in the year ended 31 December 2013 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

(US dollars in millions)	Total	RMBS	Corporate	CMBS	ABS	Other Invested assets
Balance, 1 January 2013	$233	$41	$16	$6	$24	$146
Total net gains included in income	34	3	7	1	-	23
Acquisitions	118	25	29	8	17	39
Disposals	(99)	(20)	(12)	(3)	(13)	(51)
Transfers into Level 3	-	-	-	-	-	-
Transfers out of Level 3	(30)	-	(30)	-	-	-
Balance, 31 December 2013	$256	$49	$10	$12	$28	$157
Amount of gains/(losses) relating to balances still held at year end	$14	$-	$(2)	$-	$-	$16

Corporate assets transferred out of Level 3 were as a result of a credit upgrade during the year.

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

(US dollars in millions)	Total	RMBS	Corporate	CMBS	ABS	Other Invested assets
Balance, 1 January 2012	$167	$44	$-	$3	$-	$120
Total net gains included in income	24	7	-	1	3	13
Acquisitions	119	20	16	2	22	59
Disposals	(82)	(33)	-	(2)	(1)	(46)
Transfers into Level 3	5	3	-	2	-	-
Balance, 31 December 2012	$233	$41	$16	$6	$24	$146
Amount of gains relating to balances still held at year end	$14	$2	$-	$-	$3	$9

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

Fair value of financial instruments

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

Fixed maturities and short-term investments

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

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

Other invested assets

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

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

Derivatives

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

Subordinated debt

Subordinated debt is carried at amortised cost. At 31 December 2013, the fair value of the subordinated debt was $86 million, which compared to a carrying value of $93 million. The fair value of the subordinated debt is estimated by comparing the Group's non-controlling preferred stock and other peer group instruments to determine market required yields. As such, fair value of subordinated debt is classified as Level 2.

Other assets and liabilities

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

7   Reserves for losses and loss expenses

The Group establishes reserves for losses and loss expenses, which are estimates of future payments of reported and unreported losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves is complex and imprecise, requiring the use of informed estimates and judgements. The Group's estimates and judgements 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 2013 and 2012.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2013 and 2012 is as follows:

(US dollars in millions)	2013	2012
Gross unpaid losses and loss expenses, beginning of year	$6,686	$6,467
Reinsurance recoverable on unpaid losses and loss expenses	(1,400)	(1,188)
Net unpaid losses and loss expenses, beginning of year	5,286	5,279
Net incurred losses and loss expenses for claims related to:
Current year	2,230	2,159
Prior years	(167)	(139)
Total net incurred losses and loss expenses	2,063	2,020
Net paid losses and loss expenses for claims related to:
Current year	(589)	(550)
Prior years	(1,414)	(1,519)
Total net paid losses and loss expenses	(2,003)	(2,069)
Foreign exchange and other	27	56
Net unpaid losses and loss expenses, end of year	5,373	5,286
Reinsurance recoverable on unpaid losses and loss expenses	1,336	1,400
Gross unpaid losses and loss expenses, end of year	$6,709	$6,686

As a result of the changes in estimates of insured events in prior years, the 2013 reserves for losses and loss expenses net of reinsurance recoveries decreased by $167 million (2012: $139 million). The decrease in reserves relating to prior years was due to better than expected claims development and reductions in uncertainty surrounding the quantifications of the net cost claim events.

Prior-year releases for the year ended 31 December 2012 include $20 million of out-of-period adjustments, principally reflecting income on certain reinsurance commutations executed between 2009 and 2011. The impacts of these items were not material to any of the prior periods.

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:

			2013			2012
(US dollars in millions)	Premiums written	Premiums earned	Losses incurred	Premiums written	Premiums earned	Losses incurred
Direct	$3,343	$3,226	$1,577	$3,112	$2,897	$1,523
Assumed	1,966	1,920	972	1,860	1,661	1,052
Ceded	(1,257)	(1,198)	(486)	(1,138)	(954)	(555)
Net premiums	$4,052	$3,948	$2,063	$3,834	$3,604	$2,020

The Group's reinsurance recoverable on unpaid and paid losses as at 31 December 2013 and 2012 is as follows:

(US dollars in millions)	2013	2012
Gross reinsurance recoverable	$1,509	$1,537
Provision for uncollectible balances	(29)	(34)
Net reinsurance recoverable	$1,480	$1,503

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

At 31 December 2013 there were four counterparties which accounted for 5 per cent or more of the total reinsurance recoverable balance.

	% of reinsurance recoverable	Security
Munich Re	27%	A+ (A.M. Best)
DE Shaw Re	8%	Collateralised
Swiss Re	7%	A+ (A.M. Best)
Syndicate 6111	7%	A (A.M. Best)

The Syndicate 6111 contract operates on a funds withheld basis.

9   Subordinated debt

The Group's outstanding subordinated debt as at 31 December 2013 and 2012 consisted of the following:

(US dollars in millions)	2013	Rate of return %	2012	Rate of return %
Variable rate, face amount €7, due 15 March 2035	$10	3.13	$9	3.81
Variable rate, face amount $27, due 15 March 2036	27	3.49	27	3.72
Variable rate, face amount $31, due 15 September 2036	31	3.42	31	3.65
Variable rate, face amount $10, due 15 September 2036	10	3.32	10	3.55
Variable rate, face amount €11, due 15 September 2036	15	3.17	15	3.80
Total subordinated debt	$93		$92

On 12 May 2006 Catlin Underwriting (formerly known as Wellington Underwriting plc) issued $27 million and €7 million of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all senior creditors, as defined in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 317 basis points for the Dollar note and 295 basis points for the Euro note. Interest is payable quarterly in arrears. The notes were redeemable at the discretion of the issuer beginning on 15 March 2011 with respect to the Dollar notes and 22 May 2011 with respect to the Euro notes.

On 20 July 2006 Catlin Underwriting issued $31 million, $10 million and €11 million of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all senior creditors, as defined in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 310 basis points for the $31 million notes and 300 basis points for the other two notes. Interest is payable quarterly in arrears. The notes were each redeemable at the discretion of the issuer on 15 September 2011. All outstanding subordinated debt is fully amortised.

10 Intangible assets and goodwill

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

Net intangible assets and goodwill as at 31 December 2013 and 2012 consist of the following:

(US dollars in millions)	Goodwill	Indefinite life intangibles	Total
Net value at 1 January 2012	$77	$640	$717
Movements during 2012:
Foreign exchange revaluation	3	-	3
Total movements during 2012	3	-	3
Net value at 31 December 2012	$80	$640	$720
Movements during 2013:
Foreign exchange revaluation	-	-	-
Total movements during 2013	-	-	-
Net value at 31 December 2013	$80	$640	$720

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

Indefinite life intangible assets and goodwill are tested annually for impairment as at 30 September. For the purposes of impairment testing, $14 million of goodwill is attributable to the US segment, the remainder to the London/UK segment. In 2013 and 2012, management determined that no impairment of intangibles or goodwill was required.

11 Taxation

Bermuda

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

United Kingdom

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

The Finance Bill 2013 introduced a reduction to the UK corporation tax rate from 23 per cent to 21 per cent from 1 April 2014 and to 20 per cent from 1 April 2015. The impact of these rate reductions has reduced the carrying value of the Group's deferred tax liabilities by approximately $20 million.

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

United States

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

Switzerland

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

Other international income taxes

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

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

The income tax expense for the year ended 31 December 2013 and 2012 is as follows:

(US dollars in millions)	2013	2012
Current tax expense/(benefit)	$28	$(1)
Deferred tax (benefit)/expense	(12)	8
Change in uncertain tax positions	-	2
Rate change on deferred tax	(20)	(19)
Benefit for income taxes	$(4)	$(10)

The effective tax rate for the Group is negative 0.9 per cent (2012: negative 2.8 per cent). The rate change benefit of $20 million is a result of a reduction in the UK corporation tax rate from 23 per cent to 20 per cent on the Group's net UK deferred tax liabilities. This deferred tax benefit reduces the Group's effective tax rate from 3.8 per cent to negative 0.9 per cent.

A reconciliation of the difference between the expense for income taxes and the expected tax expense at the weighted average tax rate for the years ended 31 December 2013 and 2012 is provided below. The weighted average expected tax expense has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

(US dollars in millions)	2013	2012
Expected tax (benefit)/expense at weighted average rate	$(34)	$11
Permanent differences:
Disallowed expenses and losses not recognised	49	5
Prior year adjustments including changes in uncertain tax positions	1	(7)
Rate change	(20)	(19)
Benefit for income taxes	$(4)	$(10)

The components of the Group's net deferred tax liability as at 31 December 2013 and 2012 are as follows:

(US dollars in millions)	2013	2012
Deferred tax assets:
Net operating loss carry forwards	$40	$160
Foreign tax credits	65	48
Capital allowances	11	16
Other timing differences	47	33
Valuation allowance	(65)	(31)
Total deferred tax assets	$98	$226
Deferred tax liabilities:
Untaxed profits	(146)	(308)
Intangible assets arising on business combination	(73)	(85)
Syndicate capacity	(19)	(18)
Total deferred tax liabilities	$(238)	$(411)
Net deferred tax liability	$(140)	$(185)

As at 31 December 2013, the Group has operating tax losses carried forward of $186 million (2012: $691 million) which are available to offset future taxable income. The historic tax losses primarily arose in UK subsidiaries and related to accelerated tax deductions for Lloyd's member-level reinsurance premiums. UK legislation has aligned the deduction for these reinsurance premiums with the taxation of reinsurance recoveries. Consequently, the timing difference and therefore the losses carried forward balance has been fully utilised.

As at 31 December 2013 there are potential deferred tax assets of $39 million (2012: $27 million) in the US subsidiaries but a valuation allowance has been recognised in respect of $32 million. A full valuation allowance has been recognised in respect of carried forward tax losses and future tax deductions in other Group subsidiaries amounting to $32 million.

Uncertain tax positions

As at 31 December 2013 the liability amount of uncertain tax benefits was $15 million (2012: $15 million). All unrecognised tax benefits would affect the effective tax rate if recognised.

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

(US dollars in millions)	2013	2012
Unrecognised tax benefits balance at 1 January	$15	$13
Gross increase for tax positions of prior years	-	2
Unrecognised tax benefits balance at 31 December	$15	$15

The Group does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts. The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements. The Group did not pay or accrue any interest or penalties in 2013 or 2012 relating to uncertain tax positions.

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

Major tax jurisdiction	Years
United Kingdom	2008-2013
United States	2010-2013
Switzerland	2011-2013

12 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2013 and 2012:

	2013	2012
Common stock, par value $0.01
Authorised	500,000,000	500,000,000
Issued	362,053,537	361,824,004
Stock held by Employee Benefit Trust	(4,286,374)	(10,777,727)
Outstanding	357,767,163	351,046,277
Preferred stock issued by consolidated subsidiary, par value $0.01
Authorised, issued and outstanding	600,000	600,000

The following table outlines the changes in common stock issued during 2013 and 2012:

	2013	2012
Balance, 1 January	361,824,004	360,990,321
Exercise of stock options and warrants	229,533	833,683
Balance, 31 December	362,053,537	361,824,004

Treasury stock

Through an Employee Benefit Trust ('EBT'), the Group holds shares that will be used to satisfy Performance Share Plan ('PSP') and/or other employee share plan awards if and when they vest and become exercisable. The EBT has not purchased shares during 2013. The cost of shares held by the EBT of $37 million is shown as a deduction to the stockholders' equity.

Warrants

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

Non-controlling preferred stock

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

Dividends

Dividends on common stock

On 22 March 2013 the Group paid a final dividend on the common stock relating to the 2012 financial year of 20.0 pence per share (31.3 cents per share) to stockholders of record at the close of business on 22 February 2013. The total dividend paid for the 2012 financial year was 29.5 pence per share (46.0 cents per share).

On 20 September 2013, the Group paid an interim dividend relating to the 2013 financial year of 10.0 pence per share (15.5 cents per share) to stockholders of record on 23 August 2013.

Non-controlling preferred stock dividend

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

13 Employee stock compensation schemes

During 2013 and 2012, the Group had a number of employee schemes in place, of which the most significant is the Performance Share Plan ('PSP'), adopted in 2004. The Long Term Incentive Plan ('LTIP') was adopted in 2002 and the last awards were made in 2004. In addition, the Group also has three Employee Share Plans in place. The expense related to the Employee Share Plans is considered to be insignificant. These financial statements include the total cost of stock compensation for all plans, calculated using the fair value method of accounting for stock-based employee compensation.

The total amount expensed to income in respect of all plans in the year ended 31 December 2013 was $50 million (2012: $29 million), included in administrative and other expenses. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions.

Performance Share Plan

In February 2013 a total of 7,772,167 options with $nil exercise price and 2,957,343 non-vested shares (total of 10,729,510 securities) were awarded to Group employees under the PSP. In August 2013, a further 70,103 options with $nil exercise price and 14,797 non-vested shares (total of 84,900 securities) were awarded, resulting in a total of 10,814,410 securities granted to Group employees under the PSP in 2013. Up to half of the securities will vest in 2016 and up to half will vest in 2017, 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 of 3-4 per cent depending on the award. This initial valuation is revised at each balance sheet date to take account of actual achievement of the performance condition that governs the level of vesting and any changes that may be required to the attrition assumption. The difference is charged or credited to the Consolidated Income Statements, with a corresponding adjustment to equity. The total number of shares in respect of which PSP securities were outstanding at 31 December 2013 was 35,645,656 (2012: 33,187,769), and the total amount of expense relating to PSP for the year ended 31 December 2013 was $50 million (2012: $29 million).

The table below shows the PSP securities as at 31 December 2013 and activity during 2013:

	Number of awards	Weighted average fair value
Outstanding, 1 January 2013	33,187,769	$8.16
Granted during year	10,814,410	$8.18
Forfeited during year	(3,576,078)	$8.15
Exercised during year	(4,780,445)	$7.91
Outstanding, 31 December 2013	35,645,656	$9.64
Exercisable, end of year	1,208,363	$9.64

The total fair value of shares vested during the year was $42 million (2012: $23 million).

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

The total compensation to be expensed in future periods relating to unvested awards outstanding at the year end is $66 million. The weighted average period of recognition of these shares is 2.2 years.

Long Term Incentive Plan

Options over a total of 16,791,592 ordinary common shares were granted to eligible employees in 2004 and prior years. The LTIP options were fully exercisable and expensed by 31 December 2007. There was no compensation expense in relation to the LTIP for the years ended 31 December 2013 and 2012. All options expired on 4 July 2012; therefore there were no options outstanding at 31 December 2012.

14 Earnings per share

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

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

(i)         PSP;

(ii)         LTIP;

(iii)        Warrants; and

(iv)        Employee Share Plans.

Income to common stockholders is arrived at after deducting non-controlling preferred stock dividends of $44 million (2012: $44 million).

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

	2013	2012
Weighted average number of shares	355,350,786	349,064,734
Dilution effect of warrants	-	708,472
Dilution effect of stock options and non-vested shares	25,015,705	16,844,854
Weighted average number of shares on a diluted basis	380,366,491	366,618,060
Earnings per common share
Basic	$1.11	$0.88
Diluted	$1.03	$0.83

In 2013 and 2012 securities awarded under the PSP were included in the computation of diluted earnings per share to the extent that the performance conditions necessary for these securities to vest were met as at 31 December 2013 and 2012.

15 Other comprehensive income/(loss)

The following table details the individual components of other comprehensive income/(loss) for 2013 and 2012:

(US dollars in millions)		Amount before tax		Tax benefit		Amount after tax
2013
Cumulative translation adjustments		$(14)		$8		$(6)
Defined benefit pension plan		-		-		-
Other comprehensive (loss)/income		$(14)		$8		$(6)
2012
Cumulative translation adjustments	$24		$6		$30
Defined benefit pension plan	2		-		2
Other comprehensive income	$26		$6		$32

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

(US dollars in millions)	2013	2012
Cumulative translation adjustments	$(203)	$(197)
Funded status of defined benefit pension plan adjustment	3	3
Accumulated other comprehensive loss	$(200)	$(194)

16 Pension commitments

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

In the UK the Group operates defined contribution schemes for certain directors and employees, which are administered by third-party insurance companies. The pension cost for the UK scheme was $14 million for the year ended 31 December 2013 (2012: $13 million).

In Bermuda the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2013 (2012: $1 million).

In the US the Group has adopted a 401(k) Profit Sharing Plan qualified under the Internal Revenue Code and a Non-Qualified Deferred Compensation Plan under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the US scheme was $6 million for the year ended 31 December 2013 (2012: $3 million).

In Switzerland the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Switzerland scheme was $2 million for the year ended 31 December 2013 (2012: $1 million).

In connection with the acquisition of Wellington in December 2006, the Group assumed liabilities associated with a defined benefit pension scheme which Wellington sponsored. The scheme has been closed to new members since 1993. The current membership consists only of pensioners and deferred members. Projected benefit obligations at 31 December 2013 were $29 million (2012: $30 million) and fair value of plan assets was $32 million (2012: $33 million). Plan assets are substantially all invested in corporate bonds, valued using Level 2 inputs in the fair value hierarchy described in Note 6. The pension costs for the defined benefit scheme were insignificant for the years ended 31 December 2013 and 2012.

Pension costs for pension schemes in other countries of operation are considered individually insignificant but in aggregate amount to $4 million (2012: $4 million).

17 Statutory financial data

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

US dollars in millions	2013	2012
United Kingdom	$183	$167
United States	109	87
Switzerland	1,231	1,078
Bermuda	792	995

The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,352 million (2012: $1,178 million).

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

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

18 Commitments and contingencies

Legal proceedings

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

Concentrations of credit risk

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

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

Letters of credit

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

As at 31 December 2013, the Group has access to the following letter of credit facilities:

·      A $450 million unsecured multi-bank facility available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2013, $150 million of letters of credit were issued under this facility. The facility has a termination date of 31 December 2016.

·      A bilateral facility available for utilisation by Catlin Bermuda, collateralised by pledged financial assets. As at 31 December 2013, $200 million of letters of credit were issued under this facility.

·      A bilateral facility available for utilisation by Catlin Re Switzerland, collateralised by pledged financial assets. As at 31 December 2013, $18 million of letters of credit were issued under this facility.

·      Four bilateral facilities available for utilisation by Catlin Bermuda and guaranteed by the Company for Funds at Lloyd's purposes, amounting to a total of $375m. As at 31 December 2013, $375 million of letters of credit were issued under these facilities. One of the facilities has an expiry date of 31 December 2017, while the other three have expiry dates of 31 December 2018.

·      An Australian $50 million ($45 million) unsecured bilateral facility, available for utilisation by appointed members of the Group and guaranteed by the Company, for the purpose of providing collateral to Australian beneficiaries. As at 31 December 2013, Australian $48 million ($43 million) of letters of credit were issued under this facility.

·      A $75 million unsecured bilateral facility, available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2013, $75 million of letters of credit were issued under this facility.

·      A facility managed by Lloyd's, acting for the Syndicates. As at 31 December 2013, $9 million of letters of credit were issued under this facility.

·      Catlin US has letters of credit amounting to $1 million issued for the benefit of various parties.

Future lease commitments

The Group leases office space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2013 are as follows:

(US dollars in millions)
2014	$29
2015	27
2016	22
2017	19
2018 and thereafter	85
Total	$182

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $22 million (2012: $25 million).

19 Related parties

The Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2013 and 2012 was insignificant to the Group Financial Statements.

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

20 Subsequent events

Proposed dividend

On 7 February 2014 the Board approved a proposed final dividend of 21.0 pence per share (34.3 cents per share), payable on 20 March 2014 to stockholders of record at the close of business on 21 February 2014. The final dividend is payable in sterling.

Non-controlling preferred stock dividend

The Board of Catlin Bermuda approved a dividend of $22 million to the stockholders of the non-cumulative perpetual non-controlling preferred stock. This dividend was paid on 19 January 2014.

Management has evaluated subsequent events until 7 February 2014, the date of issuance of the financial statements.

 

END

 

 

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