Final Results

RNS Number : 4677E

Catlin Group Limited

10 February 2015

10 February 2015 Release 2015-3

CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2014

Strong Underwriting, Investment Performances
Contribute to 13 Per Cent Increase in Profit Before Tax

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 2014.

Highlights

· 13 per cent increase in profit before tax to US$488 million (2013: $432 million)

· 7 per cent increase in net income to common stockholders to US$418 million (2013: $392 million)

· 16.3 per cent return on net tangible assets (2013: 17.0 per cent); 13.1 per cent return on equity
(2013: 13.4 per cent)

· Net underwriting contribution of US$991 million (2013: US$1.00 billion)

· 50.6 per cent attritional loss ratio (2013: 50.1 per cent)

· 86.8 per cent combined ratio (2013: 85.6 per cent)

· 12 per cent increase in gross premiums written to US$5.97 billion (2013: US$5.31 billion)

§ 54 per cent of total GPW produced by non-London hubs (2013: 53 per cent)

· Total investment return of US$241 million or 2.6 per cent (2013: US$135 million or 1.5 per cent)

§ Includes US$31 million valuation gain on loans made to Box Innovation Group Limited; additional estimated US$40 million to be recognised when sale is completed, expected in first quarter of 2015

· 5 per cent increase in annual dividend to 32.5 UK pence per share (51.2 US cents) (2013: 31.0 UK pence; 49.8 US cents)

§ Board is also expected to declare a special dividend of approximately 12 UK pence per share following completion of Box Innovation Group sale

History

Since Catlin's initial public offering in 2004:

· Gross written premium volume has increased from US$1.43 billion to US$5.97 billion.

· The number of offices has increased from seven to 55.

· The number of countries in which those offices are located has increased from six to 25.

· The amount of gross premiums written outside of the London hub has increased from 7 per cent to 54 per cent.

· The Group’s market capitalisation has increased from £539 million to approximately US$2.7 billion¹.

· Through 31 December 2014, Catlin shares have produced total shareholder return amounting to 284.8 per cent, compared with 132.5 per cent for the FTSE 350.

¹ Estimated value of offer by XL Group plc to acquire Catlin, less final and special dividends; calculated on a fully diluted basis

US$m except as noted	2014	2013
Gross premiums written	$5,966	$5,309
Net premiums written	$4,345	$4,052
Net premiums earned	$4,160	$3,948
Net underwriting contribution¹	$991	$1,003
Total investment return (US$)	$241	$135
Net income before income tax	$488	$432
Net income to common stockholders	$418	$392
Earnings per share (US dollars)	$1.17	$1.11
Total dividend per share (pence)	32.5p	31.0p
Total dividend per share (US cents)	51.2¢	49.8¢
Loss ratio	52.5%	52.3%
Expense ratio²	34.3%	33.3%
Combined ratio²	86.8%	85.6%
Total investment return (%)	2.6%	1.5%
Return on net tangible assets³	16.3%	17.0%
Return on equity³	13.1%	13.4%
	31 Dec 2014	31 Dec 2013
Total assets	$15,347	$14,520
Investments and cash	$9,275	$9,217
Stockholders' equity	$3,992	$3,783
Unearned premiums	$3,062	$2,728
Net tangible assets per share (sterling)⁴	£4.95	£4.32
Net tangible assets per share (US dollars)⁴	$7.73	$7.17
Book value per share (sterling)⁴	£6.07	£5.37
Book value per share (US dollars)⁴	$9.47	$8.92

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 financing expenses and restructuring costs, profit-related bonuses, employee 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 again produced good financial results during 2014 as profit before tax increased by 13 per cent to US$488 million. The Group's underwriting operations performed well, with net underwriting contribution amounting to US$991 million. Net tangible assets per share increased during 2014 by 8 per cent to US$7.73, while book value per share rose by 6 per cent to US$9.47.

"While I am pleased with Catlin's performance in 2014, I also believe that the offer to acquire Catlin by XL Group plc would result in a business combination that will become a leader in the global property/casualty insurance industry and result in the realisation of significant value for our shareholders."

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

"Catlin continued to grow profitably during 2014, which demonstrates that our operating
strategy - based on disciplined underwriting and diversification - has successfully differentiated Catlin from many of its peers.

"At the time of our initial public offering in 2004, Catlin set the goal to produce long-term shareholder returns that exceed the risk-free rate by 10 percentage points. I am happy to say that we have continued to meet that target. Catlin's average return on net tangible assets since the IPO amounts to 16.8 per cent, while the risk-free return over that period has averaged 2.3 per cent. Average return on equity over the period was 13.2 per cent.

"I believe that the combination of XL and Catlin would result in a broader, better balanced and more efficient underwriting organisation that would be able to compete more effectively in the evolving marketplace. The acquisition would bring together two highly compatible cultures based on an underwriting-first mentality. Catlin for 30 years has been building a business for the future, and we would continue to do so as part of a new, dynamic organisation."

Catlin Group Limited's Annual General Meeting will be held on Thursday 6 August 2015, instead of Tuesday 5 May 2015 as previously announced.

- ends -

For more information contact:

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

Notes to editors:

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

2. Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2014 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial, investment performance and other 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 2014: £1= US$1.56 (2013: £1 = US$1.66); average rate for 2014: £1 = US$1.65 (2013: £1 = US$1.57).

6. Earnings per share are based on weighted average shares in issue of 358 millionduring 2014. Book value per share is based on 359 million shares in issue at 31 December 2014. 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 25 countries.

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

9. Catlin is the title sponsor of the Catlin Seaview Survey, a major scientific expedition that is documenting the composition and health of oceans, particularly coral reefs, around the world. Since 2012 the Survey has documented more than 650 kilometres of reefs in 22 countries and taken more than 500,000 panoramic images. The 2015 Survey is focusing on coral reefs in the Indian Ocean. 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

These are exciting times for Catlin and its shareholders, due to the strong financial performance Catlin has produced during 2014 and the £2.79 billion offer by XL Group plc to acquire Catlin, which the Board of Directors has recommended.

2014 performance

I am pleased to report that Catlin again produced good financial results in 2014, despite the increasingly competitive conditions in many sectors of the marketplace. Profits before tax increased by 13 per cent to US$488 million, while return on net tangible assets amounted to 16.3 per cent.

Catlin's underwriting performance continued to be strong. Net underwriting contribution amounted to US$991 million, just short of the record set in 2013, while the attritional loss ratio - which measures the underlying profitability of Catlin's risk portfolio excluding catastrophe and large single-risk losses and reserve movements - remained low at 50.6 per cent.

Total investment return amounted to US$241 million or 2.6 per cent of invested assets, a 79 per cent increase. A portion of this increase - $31 million - is attributable to gains on loans made to Box Innovation Group, the parent of telematics auto insurer Insure the Box ('ITB'). Catlin announced in December that it would sell its stake in ITB. The disposal is expected to close in the first quarter of 2015, at which time the remainder of the gain on this investment will be realised.

Shareholder returns and dividends

Net tangible assets per share increased by 8 per cent in 2014 to US$7.73 per share, while book value per share rose by 6 per cent to US$9.47 per share.

The Board of Directors has declared a 2014 final dividend of 22 pence per common share (33.5 US cents), payable on 19 March 2015 to shareholders of record on 20 February 2015. Combined with the interim dividend, the total dividend payable for 2014 of 32.5 pence per share (51.2 US cents) represents a 5 per cent increase compared with the 2013 total dividend. In addition, the Board expects to declare a special dividend of approximately 12 pence per common share following completion of the sale of ITB.

Catlin shares have produced excellent total shareholder return, both over the medium and long terms. For the five years ended 31 December 2014, total shareholder return amounted to 173.8 per cent. This compares with the average total shareholder return of 51.2 per cent produced by the FTSE 350 during the same period.

Since the Group's initial public offering in 2004 through 31 December 2014, Catlin shares produced total shareholder return of 284.8 per cent, compared with 132.5 per cent for the FTSE 350.

Board of Directors

Claus-Michael Dill and Beatrice Hollond joined the Board as Non-Executive Directors in May 2014. Claus-Michael was formerly Chief Executive Officer of AXA Konzern AG in Cologne, responsible for operations in Germany and Central Europe. Beatrice is Chairman of Keystone Investment Trust plc and has had a long career in the investment industry. Both Claus-Michael and Beatrice made important contributions to the Board's discussions during the year.

XL offer

While XL and Catlin are well-positioned to succeed on their own, each company believes that combining operations would put the merged companies in a better position to face the key challenges now evident in the property/casualty insurance and reinsurance sector.

Under the terms of the offer, Catlin shareholders would receive 388 UK pence in cash and 0.130 new XL shares for each Catlin common share they hold. Details of the offer are included in our press release dated 9 January 2015 and further details will be provided in due course.

The Catlin Board of Directors have considered the terms of the XL offer in relation to the value and prospects and the potential medium-term stand-alone value of Catlin. The Board of Directors intends to recommend that shareholders vote in favour of the offer because it makes strong strategic and financial sense for Catlin shareholders.

In connection with the XL offer, Stephen Catlin is expected to join the Board of Directors of XL Group plc as Executive Deputy Chairman once the transaction is completed. In addition, it is expected that an additional Catlin Director, who meets applicable independence qualifications and other criteria, will join the XL Group Board.

Conclusion

I have been privileged to serve as a Director of Catlin since December 2011 and as Chairman since May 2012, and the Group has made great progress over that period. The Catlin brand is recognised globally for underwriting excellence and exemplary levels of service, and I am confident that Catlin would have continued to perform well as an independent company. However, my fellow Directors and I agree that the business combination with XL would lead to a stronger future for Catlin and result in the realisation of significant value for our shareholders.

I wish to thank all of those who work at Catlin for their hard work and loyalty to the Group. I would particularly like to thank Stephen Catlin, who founded the Group more than 30 years ago and who has never tired in his goal of building a business for the future. I wish Stephen and all other Catlin employees the best of fortune in the future.

John Barton

Chairman

9 February 2015

Chief Executive's Review

After 30 successful years, it is proposed that Catlin will become part of XL Group plc during the first half of 2015, subject to the necessary approvals. While most attention is now on the proposed XL-Catlin business combination, I am proud to report that Catlin produced excellent results in 2014. The Group continued to grow profitably and to demonstrate that our operating strategy - based on disciplined underwriting and diversification - successfully differentiates Catlin from many of its peers.

In what is likely my final Chief Executive's Review, I would like to first focus on Catlin's achievements during 2014, then comment on the XL offer.

Catlin has made great progress since its initial public offering in 2004:

	2014	2004
Gross premiums written (US$m)	5,968	1,434
Employees	2,517	316
Offices	55	7
Countries in which offices are located	25	6
% of gross premiums written by non-London hubs	54%	7%
Market capitalisation (£m)	£2,695¹	£539

¹ Estimated value of XL offer less final and special dividends; calculated on a fully diluted basis

From the date of the IPO through 31 December 2014, Catlin shares produced total shareholder return of 284.8 per cent, compared with 132.5 per cent for the FTSE 350.

2014 financial results

Profits before tax increased by 13 per cent to US$488 million (2013: US$432 million). Net income to common shareholders increased by 7 per cent to US$418 million (2013: US$392 million). Return on net tangible assets amounted to 16.3 per cent (2013: 17.0 per cent), while return on equity was 13.1 per cent (2013: 13.4 per cent).

Catlin's goal, set at the time of our initial public offering in 2004, has been to produce shareholder returns over the course of a cycle that exceed the risk-free rate by 10 percentage points. I am happy to say that we have continued to meet that target. Catlin's average return on net tangible assets since the IPO amounts to 16.8 per cent, while the risk-free return over that period has averaged 2.3 per cent. Average return on equity over the period was 13.2 per cent.

Catlin's operating strategy consists of two other important components apart from disciplined underwriting and diversification: capital preservation and what we call the Catlin Culture, which serves as the foundation for everything we do. An analysis of the Group's 2014 performance against our strategic principles follows.

Disciplined underwriting

Catlin is first and foremost an underwriting organisation, so disciplined underwriting serves as the ultimate focus of the Group. The message is simple: we underwrite for a profit and have done so since the Group was established in 1984. While Catlin is often categorised as a growth company, we are much more interested in increasing profitability than top-line growth.

2014 was a successful year when examined against our strategy of disciplined underwriting:

· Net underwriting contribution - our most basic measure of underwriting performance - amounted to US$991 million in 2014, just short of the record level achieved during the previous year (2013: US$1.00 billion). However, this can be viewed as a particularly successful outcome in the light of increased competition during 2014 across many of the business classes which Catlin writes.

· Our attritional loss ratio of 50.6 per cent remained at a low level (2013: 50.1 per cent).

· The loss ratio - which includes catastrophe and large single-risk losses and reserve movements - was virtually flat against the previous year at 52.5 per cent (2013: 52.3 per cent).

While the unprecedented series of catastrophe losses during 2011 is still fresh in our minds, insurance markets' memories are often much shorter. Despite the losses sustained by the insurance industry just three years earlier, average weighted premium rates across Catlin's portfolio place decreased by 2.9 per cent during 2014 (2013: 0.8 per cent increase). Average rates decreased in five of the Group's product groups. However, our rating levels were superior to those of many other insurers and reinsurers. Why? Our performance is attributable to our analytical pricing abilities, our superior portfolio management skills, and the strength, knowledge and professionalism of our underwriting teams.

Catlin's reserving policy has led to releases from prior-year loss reserves every year since the IPO in 2004, which itself is another indicator of disciplined underwriting. During 2014 the Group released US$120 million from prior-year reserves (2013: US$167 million), which was equivalent to 2 per cent of opening reserves (2013: 3 per cent).

Diversification

2014 marked the 15^th anniversary of the opening of Catlin's first offices outside of London. Last year, the five non-London underwriting hubs - US, Bermuda, Europe, Asia-Pacific and Canada - wrote US$3.20 billion in gross premiums, or 54 per cent of the Group's total volume. In other words, these offices wrote more gross premiums in 2014 than the entire Group wrote eight years earlier.

More importantly, these hubs contributed 47 per cent - or US$464 million - of our net underwriting contribution (2013: US$480 million or 48 per cent). Catlin's global infrastructure is one of the Group's greatest competitive advantages and is an important part of our overall profitability. We believe that these hubs - particularly the US and International hubs - are capable of significant profitable growth in the future.

While our international network of offices has developed considerably, we continue to establish offices in areas in which we believe a local presence would be worthwhile or to work with established underwriting teams who signal a desire to join Catlin. Last year, we expanded our presence in the Scandinavian market, opening offices in Copenhagen and Stockholm. We established an office in Lausanne to serve the French-speaking market in Switzerland. Finally, we opened an office in Dubai, which has become the centre of the Middle East insurance market.

Meanwhile, the London hub produced great results, especially considering the competitive nature of the London/Lloyd's market during 2014. Gross premiums written in London increased by 12 per cent, due to an increase in multi-year reinsurance contracts along with greater volumes of Property and Energy business. More importantly, the hub produced record net underwriting contribution of US$527 million (2013: US$523 million)

Capital preservation and flexibility

Other than our employees, capital is Catlin's most cherished asset. We believe that the preservation of capital is vital for any insurer. We strive to make efficient use of our capital, making sure that every dollar works to build shareholder value. That's why we have consciously created a corporate structure where we can allocate capital quickly and efficiently to those areas of the business with the greatest profit potential.

Catlin's continues to have a strong capital position. Our capital buffer - the difference between available capital and required economic capital - stood at 23 per cent at 31 December 2014, slightly above the target range of 10 per cent to 20 per cent.

We aim to preserve capital through a number of methods. Our global footprint and our efforts to diversify our risk portfolio helps us reduce correlation in our book of business and therefore reduce capital requirements. Our risk transfer programme - including our Catastrophe Aggregate protections - also serves as an efficient capital management tool by helping to preserve capital following major events. The risk transfer programme includes traditional reinsurers as well as non-traditional participants, including the use of catastrophe bonds.

We have increased capital flexibility over the past three years through our third-party capital programme. This programme includes Special Purpose Syndicates ('SPS') at Lloyd's, which provide whole-account quota-share reinsurance to the Catlin Syndicate, and the Portfolio Participation Vehicle ('PPV'), which provides similar collateralised protection to our non-Lloyd's underwriting entities. We have expanded this programme each year to date, and in 2015 third-party capital providers are putting up nearly US$350 million in capital.

Catlin receives commissions and fees from these third-party capital arrangements. Commissions and fees recognised in 2014 amounted to US$66 million (2013: $28 million).

In one case, an SPS has grown into something larger. Catlin established a strategic partnership with China Re (Group) Corporation in November 2011 that included the formation of an SPS by China Re to write whole-account quota-share reinsurance for the Catlin syndicate. Three years later, China Re received permission from Lloyd's to transform its existing SPS into a stand-alone syndicate that, from 1 January 2015, is writing a diversified book of business. This syndicate, which will continue to reinsure the Catlin Syndicate in 2015, will be managed by a Catlin subsidiary for the next several years.

The formation of the China Re syndicate marks the first time that a Chinese-owned company has established a Lloyd's syndicate writing open market business. Catlin is delighted to be working in partnership with China Re to help establish its position in the Lloyd's market.

Catlin's investment strategy is to focus on capital preservation by creating economic value while managing earnings risk and maintaining liquidity. Our investment strategy has been tested during the past several years by the low interest rate environment, and gone are the days when an insurer's investment return often contributed as much to profits as its underwriting operations. In 2014 the Group achieved a total investment return of 2.6 per cent (2013: 1.5 per cent); in monetary terms, total investment return amounted to US$241million (2013: US$135 million).

US$31 million of this return was produced by a gross valuation gain in loans issued to Box Innovation Group, the parent of telematics auto insurer 'insurethebox', for which Catlin agreed to the sale of its stake in December 2014. That gain represents 0.3 per cent of total investment return. A further estimated US$40 million gain on this investment will be realised when the disposal is completed, which is expected in the first quarter of 2015. A dividend of approximately 12 pence per share is expected to be distributed to shareholders as a special dividend upon completion.

Culture

Culture is extremely important at Catlin. The Catlin Culture - based on our core values of transparency, accountability, teamwork, integrity and dignity - places great emphasis on employees' personal responsibility, which encourages our people to think and act like owners. That's good for the business and good for shareholders.

Our culture is what fosters our high levels of broker and client service. We take very seriously the feedback we receive about service levels, including the annual surveys of brokers conducted in London by Gracechurch Consulting. Catlin has been the highest-ranked insurer overall in Gracechurch's claims survey since 2007, and Catlin ranked first in nearly every overall criterion in the 2014 Gracechurch London Insurers Report.

Through our culture, Catlin strives to improve the communities which it serves. We do this in a number of ways: charitable contributions, community involvement activities and sponsorship of projects that benefit the community as a whole. The latter incudes the Catlin Seaview Survey, now in its fourth year, which is helping scientists learn much more about how our oceans - and our planet - are changing. We know that the work of the Catlin Seaview Survey will provide benefits for future generations.

Catlin was also one of the sponsors of 'Blood Swept Lands and Seas of Red', the highly moving installation of 888,246 ceramic poppies at the Tower of London. The installation, designed to commemorate the centenary of the start of the First World War, inspired the estimated 4 million people who saw what became known as 'the poppies at the Tower', plus untold millions more who viewed the display via photos or video.

The Catlin Culture is an effective recruiting tool. Prospective employees identify with our culture, especially our values, our emphasis on individual responsibility and our commitment to improving communities. The Catlin Development Programme, through which recent university graduates join the Group and receive professional and personal development training, attracted nearly 14,000 applications last year. Recent graduates responding to a 2014 online poll ranked Catlin as one of the top three UK companies at which to work.

XL offer

I have been asked many times over the past months why would Catlin agree to be acquired by a competitor. It's a good question. Catlin and XL had been discussing the future of both businesses for more than a year, and both companies' managements concurred that fundamental changes were taking place in the insurance industry. These include the increasing concentration among brokers; the need to invest in more expensive and more advanced data and analytics systems; the challenges raised by alternative capital; and increasing costs, particularly regulatory costs.

XL and Catlin determined separately that a business combination would be advantageous as merger and acquisition activity would likely increase in the insurance industry. At Catlin, we concluded that our best course would be to recommend XL's offer. In other words, if the industry is consolidating, wouldn't you rather choose the partner with which you want to work rather than have your partner chosen for you at a later date?

I believe that the combination of XL and Catlin would result in a broader, better balanced and more efficient underwriting organisation that would be able to compete more effectively in the evolving marketplace. The acquisition would bring together two highly compatible cultures based on an underwriting-first mentality. I am excited that upon completion I shall be joining the company, which will be known in the marketplace as 'XL Catlin', as Executive Deputy Chairman.

The XL offer, when completed, will result in significant added value for Catlin shareholders while still offering an investment opportunity in a company that I believe will become one of the true global leaders in our industry. I intend to hold XL shares as a long-term investment following the acquisition.

Conclusion

While the future that awaits XL Catlin is indeed exciting, I have to admit that I do feel a degree of sadness as the company which I established in 1984 enters what are likely to be its final months as an independent organisation. I believe that we have built something special at Catlin over the years, and I am especially proud that the Group has succeeded in our joint goals of providing excellent service to clients and brokers along with superior value to our investors.

I wish to pay tribute to the more than 2,500 people who currently work at Catlin. They - along with hundreds of past employees - are the principal contributors to Catlin's success, and I have been privileged to be their colleague. I thank them for their hard work and diligence, which is reflected in our 2014 accomplishments.

Catlin for 30 years has been building a business for the future, and we will continue to do so as part of a new, dynamic organisation.

Stephen Catlin

Chief Executive

9 February 2015

Key Performance Indicators

Catlin uses ten KPIs to measure performance 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
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
2014	9.47	0.52	9.99

The Group believes that the change in book value per share, plus the common share dividends paid during a calendar year, is an appropriate measure of shareholder value creation. Shareholder value using this metric increased by 12 per cent during 2014. 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
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
2014	7.73	0.52	8.25

Shareholder value can also be measured on a similar basis by combining the annual increase in net tangible assets per share with the dividends paid to shareholders during a calendar year. Growth in net tangible assets per share more accurately assesses the Group's performance against its underwriting capital, which excludes goodwill and other intangibles. Measured on this basis, shareholder value increased by 15 per cent during 2014.

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

	Return on equity	Return on net tangible assets
2010	12.5%	16.3%
2011	1.3%	1.7%
2012	11.3%	14.6%
2013	13.4%	17.0%
2014	13.1%	16.3%

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 - and in nearly every year - since the Group's IPO in 2004. Return on equity amounted to 13.1 per cent, whilst return on net tangible assets was 16.3 per cent in 2014. While both measures decreased compared with the prior year, the Group's overall profitability increased in 2014.

Income before income tax (US$m)

	Income before tax
2010	406
2011	71
2012	339
2013	432
2014	488

Pre-tax profitability is an effective measure of the combination of underwriting performance, expense control and investment return. Continued strong underwriting performance and improved investment performance during 2014 were the primary drivers of the 13 per cent increase in profits before tax to US$488 million.

Disciplined Underwriting KPIs

Net underwriting contribution (US$m)

	Net underwriting contribution
2010	683
2011	324
2012	788
2013	1,003
2014	991

Net underwriting contribution is the principal barometer of Catlin's underwriting performance. The Group produced net underwriting contribution in 2014 of US$991 million, marginally less than the record amount produced the previous year. The continued strong performance reflects the Group's focus on disciplined underwriting and superior portfolio management, along with relatively benign years for catastrophe events.

Loss ratio/Attritional loss ratio (%)

	Attritional loss ratio	Loss ratio
2010	51.6%	57.5%
2011	50.0%	70.0%
2012	50.6%	56.0%
2013	50.1%	52.3%
2014	50.6%	52.5%

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 2014 loss ratio of 52.5 per cent remained historically low, whilst the attritional loss ratio rose slightly.

Diversification KPI

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

	Gross premiums written outside London hub
2010	42.9%
2011	48.1%
2012	49.2%
2013	53.4%
2014	53.7%

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. Nearly 54 per cent of Catlin's business was produced by the non-London hubs in 2014, a small increase over the previous year.

Capital Preservation and Flexibility KPI

Capital buffer (%)

	Capital buffer
2010	20.3%
2011	13.8%
2012	14.0%
2013	21.0%
2014	23.0%

Catlin defines available capital as its net tangible assets and the perpetual preferred shares issued by Catlin Bermuda. The Group strives to maintain a buffer of available capital that is between 10 per cent and 20 per cent of required economic capital. The capital buffer at 31 December 2014 stood at 23 per cent, an increase from 21 per cent a year earlier and just above the targeted range.

Culture KPIs

Claims performance (%)

	Claims performance
2010	33%
2011	31%
2012	31%
2013	35%
2014	33%

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 since 2007 and in 2014 ranked six percentage points ahead of its closest competitor.

Voluntary employee turnover (%)

	Employee turnover
2010	9.8%
2011	12.7%
2012	9.9%
2013	8.1%
2014	8.8%

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 (excluding redundancies) was 8.8 per cent, below the five-year average. Voluntary turnover among underwriting employees amounted to 7.2 per cent (2013: 7.3 per cent).

Underwriting Review

Catlin produced another strong underwriting performance during 2014, with net underwriting contribution amounting to a near-record US$991 million (2013: US$1.00 billion). Net underwriting contribution over the past five years is shown in the table below.

Net underwriting contribution (US$m)

	Net underwriting contribution
2010	683
2011	324
2012	788
2013	1,003
2014	991

Disciplined underwriting is a key component of Catlin's strategy, along with geographic and product diversification. This strategy continued to prove successful during 2014, as the Group produced an attritional loss ratio of 50.6 per cent (2013: 50.1 per cent) and an overall loss ratio of 52.5 per cent (2013: 52.3 per cent).

Gross premiums written grew by 12 per cent to US$5.97 billion (2013: US$5.31 billion), with the volume written by the non-London underwriting hubs rising by 13 per cent. The five non-London hubs produced net underwriting contribution amounting to US$464 million (2013: US$480 million), which represented 47 per cent of the Group's total net underwriting contribution (2013: 48 per cent).

Market review

Loss experience

2014 was another benign year for catastrophe losses. Aon Benfield estimates that natural catastrophes caused US$132 billion in economic losses during 2014, 37 per cent less than the ten-year average of US$211 billion. Estimated insured natural catastrophe losses amounted to US$39 billion, again significantly less than the ten-year average of US$63 billion. Preliminary estimates from Swiss Re Sigma show that economic losses from natural catastrophe events decreased in 2014 to US$106 billion (2013: US$126 billion); insured losses amounted to US$29 billion (2013: US$37 billion).

Most of the 2014 losses were caused by extreme weather events. The ten largest natural catastrophes during the year in terms of insured losses are listed in the table below.

Largest insured natural catastrophe events in 2014¹

Dates	Event	Location	Estimated fatalities	Structures damaged	Estimated economic loss (US$bn)	Estimated insured loss (US$bn)²
June 8-10	Severe weather	France/Germany/Belgium	6	750,000	4.0	3.0
May 18-23	Severe weather	United States	0	425,000	4.0	2.9
February 8-16	Winter weather	Japan	95	288,000	5.0	2.5
January 5-8	Winter weather	United States	21	150,000	3.0	1.6
Yearlong	Drought	United States	N/A	N/A	4.0	1.5
June 3-9	Severe weather	United States	3	115,000	1.7	1.3
September 10-17	Hurricane Odile	Mexico	5	50,000	2.5	1.1
April/May 27-1	Severe weather	United States	39	115,000	1.6	1.1
April 2-4	Severe weather	United States	0	160,000	1.5	1.1
Winter 2014	Flooding	United Kingdom	0	420,000	1.5	1.0

1 Estimates as at January 2015

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

Source: Aon Benfield

The North Atlantic hurricane season was yet again much more benign than historic norms; it has now been a record nine years since a hurricane with the magnitude of Category 3 or higher has made landfall in the United States. There were only eight named storms during 2014 - the fewest since 1997 - of which only six reached hurricane force; two of these storms reached Category 3 intensity. The most significant storm was Hurricane Gonzalo, which made landfall in October in the Caribbean and Bermuda, causing an estimated US$100 million of insured losses and four fatalities.

In contrast, the Eastern and Central Pacific hurricane season was the most active on record since 1992, with 16 of the 22 named storms reaching hurricane force and nine reaching Category 3 status. However, only Hurricane Odile in September made landfall, killing five people and causing an estimated US$1.1 billion of insured losses in Mexico's Baja Peninsula.

The Pacific typhoon season was more muted, with 21 named storms falling short of the 34-year average of 27. Of these, 11 became typhoons. The most notable was Super Typhoon Rammasun, which made landfall in the Philippines and China. It caused approximately US$7.2 billion of economic damage, but only US$300 million of insured losses due to low insurance penetration in the region.

North Indian cyclone activity was broadly in line with long-term averages, but was marked by the significant damage and loss of life caused by Cyclone Hudhud in October. That storm made landfall on the Eastern coast of India, causing approximately US$650 million in insured losses and at least 68 deaths.

The strongest earthquake of the year was a magnitude-8.2 tremor that struck 1 April just off the shore of Chile near Iquique. Despite its strength, insured damage was much less than initially anticipated given the strength of local building codes.

Pricing

Average weighted premium rates across Catlin's underwriting portfolio decreased by 2.9 per cent during 2014 (2013: 0.8 per cent increase). Average weighted premium rates decreased by 6.1 per cent for catastrophe-exposed business classes and decreased by 0.7 per cent for non-catastrophe classes.

The following table 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 1999-2014 (%)

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%
2014	265%	193%	215%

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 1999-2014 (%)

	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%
2014	86%	229%	252%	212%	244%	188%

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 2013-2014 (%)

	2014	2013
Aerospace	(5%)	(8%)
Casualty	2%	6%
Energy/Marine	(3%)	0%
Property	(3%)	2%
Reinsurance	(5%)	0%
Specialty/War & Political Risk	(2%)	(1%)

Despite improvements in rates on Airline business during renewals in the second half of the year following significant losses in the sector, overall rates for Aerospace business continued to decrease year on year as pricing trends early in 2014 were based on the benign loss experience in recent years.

Overall, average weighted premium rates for Casualty classes increased by 2 per cent during 2014. Rates continued to increase for US Casualty business written by the London and US hubs, albeit more modestly. In addition, rates for the Group's UK Motor business continued to improve, contrary to wider market trends.

Weighted average premium rates for Energy/Marine business decreased by 3 per cent in 2014. This was largely due to decreasing rates on Upstream Energy risks. Marine rates saw only slight reductions across all sub-sectors (Cargo, Hull and Specie).

The combination of increased capacity for catastrophe risks - both from traditional and non-traditional sources - and several years of relatively benign large loss experience caused rates for Property Treaty Excess of Loss reinsurance and other catastrophe classes to generally decrease. Rate movements for Property Catastrophe Excess of Loss reinsurance from 1 June 2012 onwards are shown in the following table.

Catastrophe Excess of Loss rate changes at major renewal dates 1 June 2012-1 July 2014 (%)

	1 June 2012	1 July 2012	1 January 2013	1 April 2013	1 June 2013	1 July 2013	1 January 2014	1 April 2014	1 June 2014	1 July 2014
US business	8%	3%	4%	(1%)	(9%)	(5%)	(12%)	(10%)	(17%)	(12%)
Non-US business	22%	11%	0%	(1%)	0%	(3%)	(6%)	(15%)	(7)%	(13%)
Weighted average	8%	6%	2%	(1%)	(8%)	(4%)	(9%)	(14%)	(16%)	(12%)

Average weighted premium rates for direct Property business decreased by 3 per cent during the year. Rates on Binder business remained flat, but rates for US and International Property business reduced.

Rates for Specialty/War & Political Risk classes of business fell by 2 per cent . Specialty Lines rates generally increased during 2014, largely driven by rate increases on Personal Accident contracts. War & Political Risk rates decreased, reflecting benign loss experience and increased competition in the marketplace.

One of the advantages of Catlin's global footprint is that rating conditions are generally more stable in local markets than in major wholesale markets such as London and Bermuda. The table below shows rating trends during 2014 for each financial reporting segment for insurance, reinsurance and all classes of business.

Average weighted premium rate movements by financial reporting segment (%)

	Insurance	Reinsurance	Overall
London	(2.2%)	(8.2%)	(3.5%)
US	0.2%	(1.2%)	(0.3%)
Bermuda	4.2%	(7.7%)	(6.2%)
International	(1.4%)	(2.2%)	(1.7%)
Group average	(1.5%)	(5.2%)	(2.9%)

Gross premiums written

Gross premiums written by the Group increased by 12 per cent during 2014 to US$5.97 billion (2013: US$5.31 billion). However, the growth in gross premiums written was modestly inflated by items such as foreign exchange movements and an increase in the value of multiyear contracts written during 2014 in the London and Bermuda underwriting hubs. After adjusting for these items, the underlying growth in gross premiums written was approximately 7 per cent.

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

Gross premiums written by financial reporting segment 2010-2014 (US$m)

	2014	2013	2012	2011	2010
London	2,763	2,474	2,525	2,342	2,323
US	1,374	1,213	1,045	852	707
Bermuda	577	577	523	549	502
International	1,252	1,045	879	770	537
Total	5,966	5,309	4,972	4,513	4,069

The aggregate gross premiums written in non-London hubs increased by 13 per cent to US$3.20 billion (2013: US$2.84 billion). The non-London hubs accounted for 54 per cent of the Group's 2014 gross premiums written (2013: 53 per cent).

Gross premiums written by the London underwriting hub in 2014 amounted to US$2.76 billion (2013: US$2.47 billion), a 12 per cent increase. The increased volume was attributable to growth in nearly all classes of business, particularly new and existing Property business and growth of Energy lines.

The Bermuda hub's volume was flat compared with 2013 at US$577 million. Volumes for Property Catastrophe Excess of Loss reinsurance decreased, due to the decision not to renew some business in light of rate reductions, but this was offset by additional Property Treaty Specialty lines business.

Gross premiums written by Catlin US grew by 13 per cent to US$1.37 billion (2013: US$1.21 billion). As in the London hub, volume grew across most of the portfolio, with particular growth in Direct Casualty, Casualty Treaty, Facultative Reinsurance and Energy business.

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

Gross premiums written by international underwriting hubs 2010-2014 (US$m)

	2014	2013	2012	2011	2010
Europe	643	540	444	354	229
Asia-Pacific	458	373	319	304	217
Canada	151	132	116	112	91
Total	1,252	1,045	879	770	537

Gross premiums written by the Europe underwriting hub rose by 19 per cent to US$643 million (2013: $540 million), due to solid growth by both Catlin Europe, which writes insurance business, and Catlin Re Switzerland, which underwrites reinsurance. The Asia-Pacific hub's gross premiums written rose by 23 per cent to US$458 million (2013: US$373 million) with growth across nearly all classes, notably a new Specialty Lines contract, growth in Agricultural reinsurance and new Property Treaty Catastrophe Excess of Loss business. Catlin Canada produced 14 per cent growth in gross premiums written to US$151 million (2013: US$132 million), with growth across almost all classes.

Underwriting performance

The Group produced US$991 million of net underwriting contribution in 2014, a reduction of 1 per cent from the record level in the prior year (2013: $1.00 billion). This strong underwriting performance was driven by the low attritional loss ratio combined with a lower level of catastrophe losses compared with 2013.

The Group's loss ratio amounted to 52.5 per cent in 2014 (2013: 52.3 per cent), a deterioration of 0.2 percentage points, but still significantly lower than the five-year average. A historic comparison of the Group's loss ratio is shown in the table below.

Loss ratio 2010-2014 (%)

	Loss ratio
2010	57.5%
2011	70.0%
2012	56.0%
2013	52.3%
2014	52.5%

A comparison of the components of the loss ratio in 2013 and 2014 is shown in the table below.

Components of loss ratio 2013-2014 (%)

	2014	2013
Attritional loss ratio	50.6%	50.1%
Catastrophe losses	2.3%	4.3%
Large single-risk losses	2.5%	2.1%
Release of reserves	(2.9%)	(4.2%)
Reported loss ratio	52.5%	52.3%

The attritional loss ratio - which excludes catastrophe losses, large single-risk losses and prior-year reserve movements - increased slightly to 50.6 per cent (2013: 50.1 per cent) during a year when average weighted premium rates across the portfolio decreased by 2.9 per cent. The attritional performance demonstrates the Group has maintained strong underwriting discipline whilst continuing to expand its business, even in a year in which conditions were competitive for many classes.

The Group's catastrophe losses for the year amounted to US$85 million net of reinsurance and reinstatement premiums (2013: US$156 million), which in the aggregate accounted for 2.3 percentage points of the Group's net loss ratio (2013: 4.3 percentage points). This total includes losses from the Iquique Earthquake which struck off the coast of Chile in April; hailstorms in Nebraska and Europe in June; flooding in India and Pakistan in September; Hurricane Odile, which caused damage in Mexico's Baja Peninsula in September; Cyclone Hudhud, which swept across eastern India and Nepal in October; and the severe Brisbane hailstorms in November.

In 2014, large single-risk losses amounted to US$107 million net of reinsurance and reinstatement premiums (2013: US$79 million), which represented 2.5 percentage points of the Group's net loss ratio (2013: 2.1 percentage points). Large single-risk losses are defined as losses arising from man-made causes in excess of US$10 million, gross of reinsurance. In 2014, the Group sustained ten large single-risk losses, including four Aviation losses: the disappearance of Malaysian Airlines Flight 370 in March; aircraft losses caused by fighting at the Tripoli airport in July; the loss of Malaysian Airlines Flight MH17 over eastern Ukraine in July; and the loss of Air Asia Flight QZ8501 over the Java Sea in December.

The Group released US$120 million from prior-year loss reserves during 2014 (2013: US$167 million), which is equivalent to 2 per cent of opening reserves (2013: 3 per cent). The reserve release reduced the net loss ratio for 2014 by 2.9 percentage points (2013: 4.2 percentage points).

Segmental performance

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

Underwriting performance by reporting segment 2013-2014 (US$m)

	London	US	Bermuda	International	Group
2014
Gross premiums written	2,763	1,374	577	1,252	5,966
Net premiums written	1,920	997	455	973	4,345
Net premiums earned	1,895	937	449	879	4,160
Underwriting contribution	527	129	188	147	991
Loss ratio	47.7%	63.5%	34.2%	60.1%	52.5%
Attritional loss ratio	47.4%	58.9%	33.5%	57.4%	50.6%

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%

In addition to a 12 per cent increase in gross premiums written, the London hub's attritional loss ratio improved to 47.4 per cent (2013: 48.0 per cent). Net underwriting contribution increased by 1 per cent to US$527 million (2013: US$523 million).

The net underwriting contribution produced by Catlin US decreased by 23 per cent to US$129 million (2013: US$168 million). The loss ratio increased to 63.5 per cent (2013: 59.6 per cent), partly due to an increase in the attritional loss ratio to 58.9 per cent (2013: 57.0 per cent), primarily due to a number of significant individual losses.

The Bermuda hub, which primarily writes Property Treaty and Specialty Reinsurance, increased net underwriting contribution by 3 per cent to US$188 million (2013: US$183 million). Catlin Bermuda benefited from better catastrophe loss experience, coupled with good performance in all business classes.

Net underwriting contribution from the International segment increased by 14 per cent to US$147 million (2013: US$129 million). This was largely due to a reduction in aggregate catastrophe losses, a slight improvement in the attritional loss ratio to 57.4 per cent (2013: 57.5 per cent) and favourable development of prior year losses.

Product groups

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

Gross written premiums by product group 2013-2014 (US$m)

Aerospace Product Group

	2014	2013
Aviation	347	329
Satellite	26	26
Total	373	355

Casualty Product Group

	2014	2013
General Liability	546	444
Professional/Financial	460	424
Marine	104	115
Motor	193	184
Total	1,303	1,167

Energy/Marine Product Group

	2014	2013
Upstream Energy	305	247
Downstream Energy	122	106
Energy Liability	135	129
Cargo	158	161
Hull	128	117
Specie	84	76
Total	932	836

Property Product Group

	2014	2013
International	394	339
US	172	144
Binding Authorities	180	146
Total	746	629

Reinsurance Product Group

	2014	2013
Non-Proportional Property	792	801
Proportional Property	577	465
Casualty	340	258
Specialty	263	195
Marine	104	131
Total	2,076	1,850

Specialty/War & Political Risks Product Group

	2014	2013
War & Political Risks, Terrorism & Credit	228	217
Accident & Health	160	127
Equine/Livestock	117	104
Contingency	34	26
Total	539	474

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

Underwriting results by product group 2013-2014 (US$m)¹

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	Rate change
2014
Aerospace	373	260	256	1	75%	(5%)
Casualty	1,303	956	897	122	63%	2%
Energy/Marine	932	642	638	179	49%	(3%)
Property	746	622	571	148	46%	(3%)
Reinsurance	2,076	1,894	1,766	561	46%	(5%)
Specialty/War & Political Risks	539	491	432	163	38%	(2%)
2013
Aerospace	355	271	279	84	47%	(8%)
Casualty	1,167	899	830	162	61%	6%
Energy/Marine	836	607	606	143	54%	--
Property	629	501	487	109	49%	2%
Reinsurance	1,850	1,630	1,594	395	53%	--
Specialty/War & Political Risk	474	426	407	178	36%	(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.

Aerospace gross premiums written grew by 5 per cent in 2014, largely due to price increases on Airline business during the second half of the year in the aftermath of the series of significant market losses. Not surprisingly, insurance claims arising from these large single-risk losses reduced net underwriting contribution to US$1 million (2013: US$84 million).

Gross premiums written for the Casualty product group increased by 12 per cent as a result of continued development of Casualty business in the US and International hubs. The net loss ratio for the Casualty product group increased by 2 per cent, largely due to a US barge collision that resulted in a large single risk loss sustained by the London hub. This loss contributed to the reduction in Casualty net underwriting contribution to US$122 million (2013: US$162 million).

Volume for the Group's Energy/Marine portfolio grew by 11 per cent in 2014, driven by growth in Energy underwriting across all hubs, especially in the London and US hubs. The portfolio produced a 25 per cent increase in net underwriting contribution due to favourable reserve development and improved catastrophe and large single-risk loss experience.

The Property product group's gross premium volume increased by 19 per cent, driven largely by new and existing Binding Authority business written in the London hub. The Property loss ratio improved by 3 percentage points, largely due to decreased catastrophe loss experience, which resulted in a 36 per cent increase in net underwriting contribution to US$148 million (2013: US$109 million).

Gross Reinsurance premiums written increased by 12 per cent. Major contributors to the growth were Property Treaty Specialty lines, volume for which increased by 61 per cent in Europe, 57 per cent in Bermuda, 29 per cent in Asia-Pacific and 9 per cent in London. Casualty Reinsurance volume increased by 55 per cent in the US hub, 24 per cent in London and 10 per cent in Europe. The Reinsurance product group's loss ratio improved by 7 percentage points largely due to decreased catastrophe loss experience, while net underwriting contribution increased by 42 per cent to US$561 million (2013: US$395 million).

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

Development of Reinsurance Product Group gross premiums written 2010-2014 (US$m and %)

	2014	2013	2012	2011	2010
Gross premiums written	2,076	1,850	1,766	1,593	1,289
Percentage of total
Non-Proportional Property	38%	43%	44%	49%	51%
Proportional Property	28%	25%	23%	23%	23%
Casualty	16%	14%	13%	11%	13%
Specialty	13%	11%	11%	9%	5%
Marine	5%	7%	9%	8%	8%

As Catlin significantly increased the size of its overall reinsurance portfolio during this period, 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 50 per cent in 2014.

Gross premium volume for the Group's Specialty/War & Political Risks portfolio rose by 14 per cent, largely due to growth in Speciality lines written by the Asia-Pacific hub. The portfolio continues to perform well, producing a 38 per cent loss ratio (2013: 36 per cent).

2015 renewals

Average weighted premium rates for business that renewed on 1 January 2015 decreased by 2.8 per cent (2014: 3.2 per cent decrease). Rates for catastrophe-exposed classes decreased by 4.6 per cent (2014: 6.0 per cent decrease), whilst rates for non-catastrophe business classes decreased 0.9 per cent (2014: 0.9 per cent decrease).

Rate movements at 1 January 2015 for the six product groups are shown in table below.

Average weighted premium rate movements by product group at 1 January 2014 and 2015 (%)

	1 January 2015	1 January 2014
Aerospace	(5%)	(4%)
Casualty	2%	4%
Energy/Marine	(3%)	(2%)
Property	(2%)	(1%)
Reinsurance	(3%)	(5%)
Specialty/War & Political Risk	(2%)	(2%)

Overall, gross premiums written as at 31 January 2015 increased by 10 per cent (31 January 2014: 4 per cent).

1 January is a major renewal date for Property Treaty Catastrophe 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 6.9 per cent overall on 1 January 2015 (2014: 8.8 per cent decrease), with rates for US business falling an average of 7.5 per cent (2014: 12.1 per cent decrease) and international rates decreasing by 6.6 per cent (2014: 6.4 per cent decrease).

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 time with ceding companies. Cedants are increasingly instructing brokers regarding which reinsurers to approach, and the Group believes that it is generally on cedants' shortlists due to its leadership position and technical capabilities.

Financial Review

Consolidated Results of Operations (US$m)

	2014	2013	% change
Revenues
Gross premiums written	5,966	5,309	12%
Reinsurance premiums ceded	(1,621)	(1,257)	29%
Net premiums written	4,345	4,052	7%
Change in net unearned premiums	(185)	(104)	78%
Net premiums earned	4,160	3,948	5%

Net investment return	226	124	82%
Other income	14	11	27%
Total revenues	4,400	4,083	8%

Expenses
Losses and loss expenses	2,183	2,063	6%
Policy acquisition costs	986	882	12%
Administrative and other expenses	717	661	8%
Financing costs	17	19	(11%)
Net losses on foreign currency	9	26	(65%)
Total expenses	3,912	3,651	7%

Net income before income tax	488	432	13%
Income tax (expense)/benefit	(26)	4	N/M
Net income	462	436	6%
Non-controlling preferred stock dividend	(44)	(44)	-
Net income available to common stockholders	418	392	7%

	2014	2013
Loss ratio¹	52.5%	52.3%
Expense ratio²	34.3%	33.3%
Combined ratio³	86.8%	85.6%
Tax rate⁴	5.3%	(0.9%)
Return on net tangible assets⁵	16.3%	17.0%
Return on equity ⁶	13.1%	13.4%
Total investment return ⁷	2.6%	1.5%

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 and expenses relating to underwriting divided by net premiums earned; the expense ratio excludes performance-related compensation and certain Group corporate costs unrelated to underwriting

3 Total of loss ratio plus expense ratio

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

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$488 million in 2014, a 13 per cent increase from US$432 million in the previous year. The result includes a net underwriting contribution of $991 million (2013: US$1.00 billion), underpinned by a stable loss ratio of 52.5 per cent (2013: 52.3 per cent). The Group produced a strong underwriting performance in 2014 despite the impact of US$85 million in catastrophe losses and US$107 million large single risk losses, net of reinsurance and reinstatement premiums.

Another key driver of the income before tax is total investment return. The Group produced total investment return of 2.6 per cent (2013: 1.5 per cent). Total investment return amounted to US$241 million (2013: US$135 million), which was above the Group's expectations. This investment return includes a US$31 million valuation gain on loans made to Box Innovation Group Ltd, for which Catlin agreed to the sale of its stake in December 2014.

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

Net income before income tax (US$m)

	2014	2013	% change
Net underwriting contribution	991	1,003	(1%)
Total investment return	241	135	79%
Administrative expenses relating to underwriting	(441)	(435)	1%
Performance related compensation	(183)	(150)	22%
Other expenses	(93)	(76)	22%
Financing and other	(18)	(19)	(5%)
Foreign exchange	(9)	(26)	(65%)
Net income before income tax	488	432	13%

The following commentary compares the Group's 2014 financial results with the results for 2013.

Gross premiums written

Gross premiums written increased by 12 per cent to US$5.97 billion (2013: US$5.31 billion).

Aggregate gross premiums written outside the London underwriting hub (US, Bermuda, Europe, Asia-Pacific and Canada hubs) increased by 13 per cent to US$3.20 billion (2013: US$2.84 billion). These underwriting hubs accounted for 54 per cent of the total gross premiums written by the Group (2013: 53 per cent).

Rates decreased during 2014 for all product groups except Casualty. Average weighted premium rates decreased by 2.9 per cent across the entire portfolio. Average weighted premium rates for catastrophe-exposed classes of business decreased by 6.1 per cent, while rates for non-catastrophe classes decreased by 0.7 per cent.

Reinsurance premiums ceded

Reinsurance premiums ceded increased by 29 per cent to US$1.62 billion (2013: US$1.26 billion). The percentage of gross premiums written ceded to reinsurers increased to 27 per cent (2013: 24 per cent). This reflects increased amounts ceded during 2014 to third-party capital providers, including Special Purpose Syndicates at Lloyd's ('SPS') and participants in the Portfolio Participation Vehicle ('PPV'), both of which provide whole-account quota share reinsurance to the Group's various underwriting platforms.

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 or the PPV. These amounts are usually recognised during the calendar year for which the SPS/PPV accepts risk and for two additional years.

Total commissions and fees from the SPS and PPV contracts recognised in 2014 amounted to US$66 million (2013: US$28 million).

Net premiums earned

Net premiums earned increased by 5 per cent to US$4.16 billion (2013: US$3.95 billion). Growth in net premiums earned was lower than the growth in gross premiums written, in line with the Group's expectations, largely due to the increased amounts ceded to third-party capital providers. In addition, a greater volume of business written late in the year during 2014, as compared with 2013, also contributed to the gap between the growth in gross premiums written and net premiums earned.

Losses and loss expenses

The Group's loss ratio remained stable at 52.5 per cent during 2014 (2013: 52.3 per cent).

The Group incurred catastrophe losses in 2014 which totalled US$85 million, net of reinsurance and reinstatements (2013: US$156 million). Included among the 2014 catastrophe events were the Chilean earthquake in April; the European hailstorms in June; Hurricane Odile, which caused damage in Mexico's Baja Peninsula in September; Cyclone Hudhud, which swept across eastern India and Nepal in October; and the severe Brisbane hailstorms in November.

The components of the Group's loss ratio in 2014 and 2013 are analysed in the table below.

Analysis of loss ratio (%)

	2014	2013
Attritional loss ratio	50.6%	50.1%
Catastrophe losses	2.3%	4.3%
Large single-risk losses	2.5%	2.1%
Release of reserves	(2.9%)	(4.2%)
Reported loss ratio	52.5%	52.3%

The large single-risk losses sustained by the Group in 2014 increased the loss ratio by 2.5 percentage points (2013: 2.1 percentage points).

The Group released US$120 million from prior-year loss reserves during 2014, an amount equal to 2 per cent of opening reserves (2013: US$167 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 2014 net underwriting contribution of US$991 million represents a 1 per cent decrease (2013: US$1.00 billion). Of the total underwriting contribution, 53 per cent was produced by the London underwriting hub; 47 per cent was produced by the Group's other underwriting hubs (2013: 52 per cent London, 48 per cent other).

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 34.3 per cent (2013: 33.3 per cent). The components of the expense ratio and corporate expenses are analysed in the table below.

Analysis of expense ratio (US$m and %)

	2014	Components of expense ratio	2013	Components of expense ratio
Policy acquisition costs	986	23.7%	882	22.3%
Administrative expenses
Relating to underwriting	441	10.6%	435	11.0%
Performance-related compensation	183	-	150	-
Other expenses	93	-	76	-
Administrative and other expenses	717	10.6%	661	11.0%
	1,703	34.3%	1,543	33.3%

The policy acquisition cost ratio increased to 23.7 per cent (2013: 22.3 per cent), primarily due to a reclassification of certain London underwriting hub acquisition costs which has no impact on profits. Administrative expenses represent 10.6 percentage points of the overall expense ratio (2013: 11.0 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.

Total investment return

Total investment return amounted to 2.6 per cent (2013: 1.5 per cent). The table below summarises the total investment return during the year.

Total investment return (US$m)

	2014	2013
Total investments and cash as at 31 December	9,275	9,217

Investment income	134	127
Net gains/(losses) on fixed maturities and short-term investments	30	(94)
Net gains on other invested assets	77	102
Total investment return	241	135
Investment expenses	(15)	(11)
Net investment return	226	124

Net losses on foreign currency

Catlin reported a loss on foreign currency exchange amounting to US$9 million (2013: US$26 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, due to the strengthening of the US dollar against all other major currencies. 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$17 million (2013: US$19 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 5.3 per cent (2013: negative 0.9 per cent).

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$311 million in 2014 (2013: US$239 million). A breakdown of these contributions is shown in the table below.

Tax contributions (US$m)

	2014	2013
Corporate income taxes	94	19
Employment and social security taxes¹	157	154
Insurance premium taxes² and federal excise tax	50	56
Irrecoverable value-added taxes	10	10
	311	239

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

More than half of the tax contributions by the Group during 2014 and 2013 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 (2013: US$44 million), net income available to common stockholders increased by 7 per cent to US$418 million (2013: US$392 million). The return on net tangible assets was 16.3 per cent (2013: 17.0 per cent); the return on equity was 13.1 per cent (2013: 13.4 per cent).

Comprehensive income to common stockholders amounted to US$375 million (2013: US$386 million) and is analysed in the table below.

Statements of comprehensive income (US$m)

	2014	2013
Net income to common stockholders	418	392
Other comprehensive income/(loss)
Translation adjustments	(44)	(6)
Defined benefit pension plan	1	-
Total other comprehensive loss	(43)	(6)
Comprehensive income to common stockholders	375	386

The other comprehensive loss primarily comprises 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 2014 and 2013 appears in the table below.

Summary of Consolidated Balance Sheets (US$m)

	2014	2013	% change
Investments and cash	9,275	9,217	1%
Intangible assets and goodwill	720	720	-
Premiums and other receivables	2,004	1,771	13%
Reinsurance recoverable	1,705	1,480	15%
Deferred policy acquisition costs	526	490	7%
Other assets	1,117	842	33%

Loss reserves	(6,705)	(6,709)	-
Unearned premiums	(3,062)	(2,728)	12%
Subordinated debt	(90)	(93)	(3%)
Reinsurance payable	(1,069)	(729)	47%
Other liabilities	(429)	(478)	(10%)
Stockholders' equity	3,992	3,783	6%

The major items in the Consolidated Balance Sheets are analysed below.

Investments and cash

Investments and cash increased by 1 per cent to US$9.28 billion (2013: US$9.22 billion). The increase is driven by cash flows from the Group's insurance operations and positive investment performance, offset by dividend payments and foreign exchange movements.

Intangible assets and goodwill

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

Intangible assets and goodwill (US$m)

	2014	2013
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)	(93)	(92)
Intangible assets and goodwill net of deferred tax	627	628

Premiums and other receivables

Premiums and other receivables increased by 13 per cent to US$2.00 billion (2013: US$1.77 billion). This increase is driven by the growth in gross premiums written in 2014.

Reinsurance recoverable

Amounts receivable from reinsurers increased by 15 per cent to US$1.71 billion (2013: US$1.48 billion). Reinsurance recoverables represent 43 per cent of stockholders' equity (2013: 39 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 23 per cent of unearned premiums, net of reinsurance, at 31 December 2014 (2013: 22 per cent).

Loss reserves

Gross loss reserves remain broadly unchanged in 2014 at US$6.70 billion (2013: US$6.71 billion). Approximately 95 per cent of net reserves relate to the 2004 and later accident years. The Group released US$120 million from prior year loss reserves during 2014, an amount equal to approximately 2 per cent of opening net reserves (2013: US$167 million or 3 per cent).

Unearned premiums

Unearned premiums increased by 12 per cent to US$3.06 billion (2013: US$2.73 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 47 per cent to US$1.07 billion (2013: US$729 million), primarily due to increased premiums ceded to the SPS and PPV, 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 2014 and 2013:

Change in total stockholders' equity (US$m)

	2014	2013
Total stockholders' equity, 1 January	3,783	3,512
Net income	462	436
Other comprehensive loss	(43)	(6)
Common share dividends	(186)	(166)
Non-controlling preferred stock dividends	(44)	(44)
Treasury stock purchased	(42)	-
Stock compensation and other	62	51
Total stockholders' equity, 31 December	3,992	3,783

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 following table.

Net tangible assets (US$m)

	2014	2013
Total stockholders' equity	3,992	3,783
Less: attributable to non-controlling preferred stock	(590)	(590)
Total common stockholders' equity	3,402	3,193
Less: intangible assets, net of tax	(627)	(628)
Net tangible assets	2,775	2,565

Book value per share (US$)	$9.47	$8.92
Book value per share (sterling)	£6.07	£5.37

Net tangible assets per share (US$)	$7.73	$7.17
Net tangible assets per share (sterling)	£4.95	£4.32

Capital

The preservation and efficient use of capital is a major strategic focus for Catlin. The Group actively manages capital through market cycles to maintain a 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).

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

· a diversified portfolio of underwriting and financial markets risks;

· controlling aggregation;

· underwriting controls; and

· risk mitigation of key underwriting and financial markets risks.

Catlin's rated underwriting entities have been assigned financial strength ratings of 'A' (Excellent) by A.M. Best and 'A' (Strong) by Standard & Poor's. These superior ratings reflect the agencies' confidence in the Group's risk management framework and level of capital. Standard & Poor's opinion of Catlin's Enterprise Risk Management programme is '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 2014 and 2013 is analysed in the table below.

Capital position (US$m)

	2014	2013
Paid-up capital (net of intangibles)	2,775	2,565
Catlin Bermuda preferred shares	590	590
Available capital	3,365	3,155

Required economic capital¹	2,725	2,612
Capital buffer to required economic capital	640	543
Capital buffer as % of required economic capital	23%	21%

Additional resources not included in calculation of available capital
Subordinated debt	90	93
Undrawn bank facilities	295	302

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 providing whole-account quota-share reinsurance to Catlin Syndicate 2003 were first established at Lloyd's during 2012. Since then the programme has continued to expand. Also in 2014, the Group established a Portfolio Participation Vehicle ('PPV') that provides whole-account reinsurance protection for all of the Group's non-Syndicate business. This arrangement has also been expanded for 2015. A variety of third-party capital providers have subscribed to the PPV.

Combined, sponsors of the Special Purpose Syndicates and the PPV have put up nearly US$350 million in capital for 2015.

The Group recognised US$66 million in commissions and fees in 2014 relating to the Special Purpose Syndicates and the Portfolio Participation Vehicle (2013: US$28 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 2012 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; and

· 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; and

· 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 2014 programme is not expected to be triggered from events during the year.

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 2015 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 the current programme have financial strength ratings of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral.

The Group actively considers and monitors the insurance-linked securities market and may sponsor such transactions when appropriate. The Group believes that its risk transfer philosophy maximises book value growth over time by retaining expected earnings variability and transferring extreme volatility.

Aggregate management

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

Accumulation of risk is monitored and controlled against risk appetite limits in compliance with policy and procedures approved by the Group Board of Directors. A selection of modelled outcomes for the Group's most significant catastrophe threat scenarios is detailed in the table below. The modelled outcomes represent the Group's modelled net loss after allowing for all reinsurances and are shown in the table. 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.

Table 3: Examples of catastrophe threat scenarios

Outcomes derived as at 1 October 2014 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	960	989	1,298	737	609
Reinsurance effect	(443)	(634)	(985)	(417)	(339)
Modelled net loss	517	355	313	320	270

Modelled net loss as a percentage of available capital¹	16%	11%	9%	10%	8%

1 Available capital amounted to US$3.3 billion at 30 June 2014.

Limitations

The modelled outcomes in the table below 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 before management fees produced by Catlin's average cash and investments of US$9.27 billion (2013: $8.86 billion) during 2014 amounted to 2.6 per cent (2013: 1.5 per cent). Total investment return before fees amounted to US$241million (2013: US$135 million), which was above the Group's expectations.

The Group's investment portfolio benefited from strong gains on risk assets, in particular from in-house managed risk mandates and from interest income from fixed maturities.

Investment performance

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

Contribution to total investment return (US$m)

US$m	2014	2013
Investment income	134	127
Net gains/(losses) on fixed maturities and short-term investments	30	(94)
Net gains on other invested assets	77	102
Total investment return	241	135

The Group's investment performance in 2014 is analysed by major asset category in the table below.

Investment performance by major asset category (US$m)

US$m	Allocation at 31 Dec 2014	Average allocation during period	Average allocation during period %	Total return	Total return (%)
Fixed maturities and short-term investments	7,714	7,140	77%	126	1.8%
Cash and cash equivalents	957	1,486	16%	4	0.3%
Other invested assets	604	640	7%	111	17.3%
Total	9,275	9,266	100%	241	2.6%

The total return from fixed maturities was mainly attributable to interest income. Net gains from fixed maturities attributable to the decrease in medium and longer-term interest rates were modest as the Group maintained a relatively low duration position during the year. The return is stated net of performance on fixed maturity overlays.

The return on other invested assets reflects strong gains from in-house-managed risk assets, primarily special situations equities and from a $31 million gross valuation gain on loans made to Box Innovation Group Limited, the owner of telematics auto insurer 'insurethebox', for which Catlin agreed to the sale of its stake in December 2014. The remaining estimated US$40 million gain on the sale will be realised when the disposal - subject to regulatory approval - is completed, which is expected in the first quarter of 2015. The net surplus arising from the sale will be distributed to shareholders upon completion by way of a special dividend.

Portfolio management and positioning

Catlin's total cash and investments increased by 1 per cent during 2014 to US$9.28 billion (2013: US$9.22 billion). The growth of the portfolio attributable to investment return and net operating cash inflows was largely offset by losses on revaluation of Catlin's non-US dollar cash and investments due to dollar strengthening against all major investment currencies during the year.

The portfolio's asset allocation at 31 December 2014 is shown in the following table.

Asset allocation at 31 December (%)

	Allocation at 31 Dec 2014	Allocation at 31 Dec 2013
Fixed maturities and short-term investments	83%	72%
Cash and cash equivalents	10%	21%
Other invested assets	7%	7%
	100%	100%

The Group's investment portfolio remains liquid with the largest proportion of assets invested in high-quality core fixed maturities and short-term instruments.

Cash and cash equivalents decreased to US$957 million at 31 December 2014 (31 December 2013: US$1.89 billion), as the Group deployed portions of its cash holdings into core fixed income securities. Deposits managed centrally by Lloyd's are now included in fixed maturities, whereas previously they were reported as cash and cash equivalents. A reclassification to the value of US$401 million has been made to the balance sheet at 31 December 2013 to reflect this change.

The Group continues to manage all US dollar core investment portfolios in-house; these amounted to US$5.5 billion in assets at 31 December 2014. The management of non-US dollar core portfolios of US$1.6 billion remains with a small number of external managers. US$406 million in risk assets were under management with specialist third-party tactical managers at 31 December 2014.

Within the fixed income portfolio, the Group benefited from sector rotation and increased its exposure to US taxable municipal bonds, which offered superior relative value in 2014, while reducing its exposure to asset-backed securities to 7 per cent of cash and investments (2013: 11 per cent). Actively managed yield curve positioning and security selection in corporate bonds and structured products also contributed to a positive investment performance.

Other invested assets amounted to US$604 million, mainly relating to direct investments in special situations equities and loans managed by the in-house team, select external tactical managers, as well as private equity funds and co-investments with strategic investment partners. The Group reduced exposure to equities during the second half of 2014 as select special situations positions reached their price targets, while the Group continued to build the Catlin expertise portfolio.

The Group maintains sufficient unrestricted liquid assets to provide for a 1-in-100 portfolio event, taking into account all risk sources plus minimal ongoing treasury operational needs. At 31 December 2014 the total amount of unrestricted liquid assets amounted to US$3.0 billion (31 December 2013: US$2.8 billion)

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

Detailed asset allocation (%)

	2014	2013
Fixed maturities and short-term investments
US government and agency securities	16%	7%
Non-US government and agency securities	20%	20%
Agency mortgage-backed securities	9%	6%
Asset-backed securities	7%	11%
Covered bonds	7%	6%
Corporate bonds	22%	18%
Commercial mortgage-backed securities	*	1%
Non-agency mortgage-backed securities	*	1%
Short-term investments	2%	2%
	83%	72%
Cash and short-term investments	10%	21%
Other invested assets	7%	7%
Total	100%	100%

*Less than 0.5 per cent

Asset quality

Catlin's fixed income portfolio at 31 December 2014 consisted of high-quality assets, with 97 per cent of the portfolio invested in government/agency securities or instruments rated 'A' or higher (2013: 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 2014 (%)

	Government/ agency	AAA	AA	A	BBB	Non- investment grade	Assets US$m
US government/agencies	19%	-	-	-	-	-	1,447
Non-US government/ agencies	25%	-	-	-	-	-	1,867
Corporate bonds	-	1%	11%	13%	1%	2%	2,058
Covered bonds	-	9%	-	-	-	-	675
Asset-backed securities	-	7%	1%	*	-	*	637
Agency mortgage-backed securities	11%	-	-	-	-	-	791
Non-agency mortgage-backed securities	-	*	-	*	-	*	36
Commercial mortgage-backed securities	-	-	*	-	-	-	3
Total	55%	17%	12%	13%	1%	2%	7,514

* 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 2014 was insignificant.

Duration positioning and yield

The duration of the Group's insurance liabilities was 2.8 years at 31 December 2014, which resulted in a liability benchmark duration (including shareholders' funds and new business cash flows) of 2.6 years or US$2.4 million in DV01 (change in value for a 1 basis point parallel shift in interest rates).

The Group actively managed its asset duration positioning across the interest rate curve primarily by using interest rate swaps. The duration of total cash and investments at 31 December 2014 was 1.2 years (2013: 1.1 years) or US$1.1m in DV01 (2013: US$1.0m). 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 1.4 per cent at 31 December 2014 (2013: 1.5 per cent).

Investment strategy

The Group's investment portfolio at 31 December 2014 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 which 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 mainly 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.

The Group continues to actively manage the in-house special situations portfolio together with a select and limited number of complementary external tactical mandates. The Group continues to acquire private equity investments with a longer-term horizon which capture illiquidity premium and benefit from market dislocations.

The Group uses overlays to manage portfolio and macro-economic risks efficiently. As at 31 December 2014, 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. Geopolitical tensions, European Union and deflationary concerns, and a slowdown in China have contributed to risk asset volatility and provide a bid for high-quality fixed income assets. This backdrop sets a challenging outlook for 2015 with the total return on fixed maturities remaining under pressure given the continued low-yield environment.

The Group remains positioned to actively manage duration positioning and sector allocation, 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.

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

Loss Reserve Development

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

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

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

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

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

· the effects of inflation;

· estimation of underlying exposures;

· changes in the mix of business;

· amendments to wordings and coverage;

· the impact of major events;

· movements in industry benchmarks;

· the incidence of incurred claims;

· the extent to which all claims have been reported;

· changes in the legal environment;

· damage awards; and

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

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

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

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

Estimate of reinsurance recoveries

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

Development of reserves for losses and loss expenses

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

The loss reserve triangles that follow 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 2014 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 2004 and prior accident years represent 4 per cent of the Group's net reserves at 31 December 2014.

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

Table 1: Summary of Catlin Group net reserves at 31 December 2014 (US$m)

Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	% of total net reserves
2004 and prior	88	127	215	4%
2005	25	37	62	1%
2006	33	47	80	2%
2007	128	8	136	3%
2008	134	1	135	3%
2009	433		433	8%
2010	391		391	7%
2011	461		461	9%
2012	659		659	12%
2013	1,047		1,047	20%
2014	1,604		1,604	30%
Sub-total	5,003	220	5,223	99%
Other net reserves¹			31	1%
Total net reserves			5,254	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: The 2010 and 2011 accident years have improved due to changes in reserving assumptions in the Casualty and Reinsurance product groups. The 2012 accident year has improved due to changes in reserving assumptions in the Reinsurance product group and better than expected experience in the Marine product group. The 2013 accident year has mainly improved due to changes in reserving assumptions and better than expected experience in the Energy and Marine product groups.

· Major events: The deterioration on 2010 major events is driven by the New Zealand Darfield earthquake, mostly due to updated cedant advices. The deterioration on 2012 major events is mainly driven by the deterioration on the Costa Concordia loss. The improvement on 2013 major events is largely driven by reductions in the Oklahoma Tornado loss and Central European Floods loss.

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				2004 & prior	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	Total
Net premiums earned						1,190	1,333	2,715	2,531	2,895	3,231	3,612	3,604	3,948	4,160

Net ultimate excluding major events
Initial estimate¹		5,881			2,492	580	626	1,359	1,521	1,784	1,651	1,802	1,783	2,020	2,248
One year later		5,857			2,429	527	585	1,412	1,496	1,753	1,630	1,818	1,758	2,005
Two years later		5,765			2,392	486	570	1,395	1,491	1,738	1,576	1,777	1,713
Three years later		5,755			2,406	464	555	1,384	1,470	1,702	1,515	1,743
Four years later		5,659			2,399	459	548	1,389	1,459	1,653	1,467
Five years later		5,650			2,403	452	549	1,382	1,454	1,648
Six years later		5,588			2,410	455	547	1,389	1,440
Seven years later		5,556			2,385	451	543	1,384
Eight years later		5,564			2,372	446	541
Nine years later					2,348	443
Ten years later					2,344
Net ultimate loss ratio excluding major events
Initial estimate¹						48.7%	46.9%	50.0%	60.1%	61.6%	51.1%	49.9%	49.5%	51.2%	54.0%
One year later						44.3%	43.8%	52.0%	59.1%	60.6%	50.5%	50.3%	48.8%	50.8%
Two years later						40.8%	42.7%	51.4%	58.9%	60.0%	48.8%	49.2%	47.5%
Three years later						39.0%	41.6%	51.0%	58.1%	58.8%	46.9%	48.3%
Four years later						38.6%	41.1%	51.2%	57.6%	57.1%	45.4%
Five years later						38.0%	41.2%	50.9%	57.4%	56.9%
Six years later						38.2%	41.0%	51.2%	56.9%
Seven years later						37.9%	40.7%	51.0%
Eight years later						37.5%	40.6%
Nine years later						37.2%
Ten years later
Net ultimate major events
Initial estimate¹					135	334			274		283	771	308	160
One year later					137	386			286		279	790	386	147
Two years later					137	397			288		292	748	409
Three years later					137	401			284		309	746
Four years later					141	393			285		336
Five years later					147	412			293
Six years later					144	409			298
Seven years later					139	414
Eight years later					137	422
Nine years later					140	422
Ten years later					141
Net ultimate including major events
Initial estimate¹		5,881			2,628	914	626	1,359	1,794	1,784	1,935	2,573	2,091	2,180	2,248
One year later		5,857			2,565	913	585	1,412	1,782	1,753	1,909	2,607	2,145	2,151
Two years later		5,765			2,529	882	570	1,395	1,779	1,738	1,868	2,524	2,122
Three years later		5,755			2,543	865	555	1,384	1,754	1,702	1,824	2,489
Four years later		5,659			2,541	853	548	1,389	1,743	1,653	1,803
Five years later		5,650			2,551	864	549	1,382	1,748	1,648
Six years later		5,588			2,554	864	547	1,389	1,738
Seven years later		5,556			2,525	865	543	1,384
Eight years later		5,564			2,509	868	541
Nine years later					2,489	865
Ten years later					2,485
Net ultimate loss ratio including major events
Initial estimate¹						76.8%	46.9%	50.0%	70.9%	61.6%	59.9%	71.2%	58.0%	55.2%	54.0%
One year later						76.7%	43.8%	52.0%	70.4%	60.6%	59.1%	72.2%	59.5%	54.5%
Two years later						74.1%	42.7%	51.4%	70.3%	60.0%	57.8%	69.9%	58.9%
Three years later						72.6%	41.6%	51.0%	69.3%	58.8%	56.5%	68.9%
Four years later						71.6%	41.1%	51.2%	68.9%	57.1%	55.8%
Five years later						72.6%	41.2%	50.9%	69.0%	56.9%
Six years later						72.6%	41.0%	51.2%	68.6%
Seven years later						72.7%	40.7%	51.0%
Eight years later						72.9%	40.6%
Nine years later						72.7%
Ten years later

Cumulative net paid			5,354		2,399	840	509	1,248	1,603	1,215	1,412	2,028	1,463	1,105	645	19,820
Estimated net ultimate claims			5,564		2,488	865	541	1,384	1,738	1,648	1,803	2,489	2,122	2,151	2,248	25,042
Estimated net claim reserves				210	88	25	33	136	135	433	391	461	659	1,047	1,604	5,223
Other net reserves²																31
Booked reserves																5,254

1 Initial estimates for 2004 and prior shown as at 31 December 2004; 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.

Development tables: Net paid losses (US$m)

		Accident Year
	Wellington accident periods 2006 and prior	2004 and prior	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Net premiums earned			1,190	1,333	2,715	2,531	2,895	3,231	3,612	3,604	3,948	4,160

Net paid excluding major events
End of accident year¹	3,748	1,301	118	154	348	309	356	402	447	490	538	645
One year later	4,099	1,594	223	264	580	669	695	704	902	944	1,027
Two years later	4,543	1,799	285	352	867	933	906	915	1,188	1,185
Three years later	4,904	1,912	341	411	1,014	1,041	1,080	1,042	1,367
Four years later	5,082	2,022	370	449	1,107	1,162	1,141	1,159
Five years later	5,200	2,096	386	479	1,163	1,242	1,215
Six years later	5,242	2,150	402	498	1,217	1,296
Seven years later	5,329	2,192	401	509	1,248
Eight years later	5,354	2,229	412	509
Nine years later		2,230	418
Ten years later		2,248
Net paid loss ratio excluding major events
End of accident year¹			9.9%	11.6%	12.8%	12.2%	12.3%	12.5%	12.4%	13.6%	13.6%	15.5%
One year later			18.7%	19.8%	21.4%	26.4%	24.0%	21.8%	25.0%	26.2%	26.0%
Two years later			23.9%	26.4%	31.9%	36.8%	31.3%	28.3%	32.9%	32.9%
Three years later			28.7%	30.9%	37.4%	41.1%	37.3%	32.2%	37.9%
Four years later			31.1%	33.7%	40.8%	45.9%	39.4%	35.9%
Five years later			32.5%	35.9%	42.8%	49.1%	42.0%
Six years later			33.8%	37.3%	44.8%	51.2%
Seven years later			33.7%	38.1%	46.0%
Eight years later			34.6%	38.2%
Nine years later			35.1%
Ten years later
Net paid major events
End of accident year¹		80	94			101		79	280	49	27
One year later		126	248			193		155	629	187	77
Two years later		131	347			251		192	648	277
Three years later		136	378			273		226	661
Four years later		138	393			300		253
Five years later		141	399			305
Six years later		141	402			307
Seven years later		140	405
Eight years later		137	422
Nine years later		139	422
Ten years later		139
Net paid including major events
End of accident year¹	3,748	1,380	212	154	348	410	356	482	727	540	565	645
One year later	4,099	1,720	471	264	580	861	695	859	1,532	1,131	1,105
Two years later	4,543	1,930	632	352	867	1,184	906	1,106	1,836	1,463
Three years later	4,904	2,048	719	411	1,014	1,314	1,080	1,268	2,028
Four years later	5,082	2,159	764	449	1,107	1,462	1,141	1,412
Five years later	5,200	2,236	785	479	1,163	1,547	1,215
Six years later	5,242	2,291	804	498	1,217	1,603
Seven years later	5,329	2,332	806	509	1,248
Eight years later	5,354	2,366	834	509
Nine years later		2,369	840
Ten years later		2,388
Net paid loss ratio including major events
End of accident year¹			17.8%	11.6%	12.8%	16.2%	12.3%	14.9%	20.1%	15.0%	14.3%	15.5%
One year later			39.6%	19.8%	21.4%	34.0%	24.0%	26.6%	42.4%	31.4%	28.0%
Two years later			53.1%	26.4%	31.9%	46.8%	31.3%	34.2%	50.8%	40.6%
Three years later			60.4%	30.9%	37.4%	51.9%	37.3%	39.3%	56.2%
Four years later			64.2%	33.7%	40.8%	57.7%	39.4%	43.7%
Five years later			66.0%	35.9%	42.8%	61.1%	42.0%
Six years later			67.6%	37.3%	44.8%	63.3%
Seven years later			67.7%	38.1%	46.0%
Eight years later			70.0%	38.2%
Nine years later			70.5%
Ten years later

1 End of accident year for 2004 and prior shown as at 31 December 2004; 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 2014 and 2013

(US dollars in millions)


	2014	2013
Assets
Investments Fixed maturities, at fair value	$7,511	$6,455
Short-term investments, at fair value	203	184
Other invested assets	604	688
Total investments	8,318	7,327

Cash and cash equivalents	957	1,890
Accrued investment income	40	39
Premiums and other receivables	2,004	1,771
Reinsurance recoverable on unpaid losses (net of bad debts)	1,451	1,336
Reinsurance recoverable on paid losses (net of bad debts)	254	144
Reinsurers' share of unearned premiums	749	529
Deferred policy acquisition costs	526	490
Intangible assets and goodwill	720	720
Unsettled trades receivable	13	51
Other assets	315	223
Total assets	$15,347	$14,520

Liabilities and stockholders' equity
Liabilities
Reserves for losses and loss expenses	$6,705	$6,709
Unearned premiums	3,062	2,728
Reinsurance payable	1,069	729
Accounts payable and other liabilities	313	276
Subordinated debt	90	93
Unsettled trades payable	37	59
Deferred tax liability (net)	59	140
Income taxes payable	20	3
Total liabilities	$11,355	$10,737

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

	2014	2013
Stockholders' equity
Common stock	$4	$4
Additional paid-in capital	1,998	1,976
Treasury stock	(39)	(37)
Accumulated other comprehensive loss	(243)	(200)
Retained earnings	1,682	1,450
Total common stockholders' equity	3,402	3,193
Non-controlling interest in preferred stock of consolidated subsidiary	590	590
Total stockholders' equity	3,992	3,783
Total liabilities and stockholders' equity	$15,347	$14,520

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

Approved by the Board of Directors on 09 February 2015.

Stephen Catlin

Director

Benjamin Meuli

Director

	2014	2013
Revenues
Gross premiums written	$5,966	$5,309
Reinsurance premiums ceded	(1,621)	(1,257)
Net premiums written	4,345	4,052
Change in net unearned premiums	(185)	(104)
Net premiums earned	4,160	3,948
Net investment return	226	124
Other income	14	11
Total revenues	4,400	4,083

Expenses
Losses and loss expenses	2,183	2,063
Policy acquisition costs	986	882
Administrative and other expenses	717	661
Financing costs	17	19
Net losses on foreign currency	9	26
Total expenses	3,912	3,651
Net income before income tax	488	432
Income tax (expense)/benefit	(26)	4
Net income	462	436
Non-controlling preferred stock dividend	(44)	(44)
Net income to common stockholders	$418	$392

Earnings per common share
Basic	$1.17	$1.11
Diluted	$1.11	$1.08

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 2014 and 2013

(US dollars in millions)

	2014	2013
Net income to common stockholders	$418	$392
Other comprehensive income/(loss), net of tax
Translation adjustments	(44)	(6)
Defined benefit pension plan	1	-
Total other comprehensive loss	(43)	(6)
Comprehensive income to common stockholders	$375	$386

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 2014 and 2013

(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 2013	$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

Net income to common stockholders	-	-	-	-	418	-	418
Other comprehensive loss	-	-	-	(43)	-	-	(43)
Stock compensation expense	-	60	-	-	-	-	60
Stock options exercised	-	2	-	-	-	-	2
Dividends	-	-	-	-	(186)	-	(186)
Treasury stock purchased	-	-	(42)	-	-	-	(42)
Distribution of treasury stock held in Employee Benefit Trust	-	(40)	40	-	-	-	-
Balance 31 December 2014	$4	$1,998	$(39)	$(243)	$1,682	$590	$3,992

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 2014 and 2013

(US dollars in millions)

	2014	2013
Cash flows provided by operating activities
Net income	$462	$436
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	26	22
Amortisation of net discounts of fixed maturities	43	46
Net gains on investments	(106)	(18)
Changes in operating assets and liabilities:
Reserves for losses and loss expenses	152	(10)
Unearned premiums	405	163
Premiums and other receivables	(275)	42
Deferred policy acquisition costs	(50)	(59)
Reinsurance recoverable on unpaid losses	(145)	71
Reinsurance recoverable on paid losses	(116)	(40)
Reinsurers' share of unearned premiums	(238)	(61)
Reinsurance payable	373	78
Accounts payable and other liabilities	34	66
Deferred taxes	(75)	(40)
Net income tax payable	11	3
Other	83	78
Net cash flows provided by operating activities	584	777

Cash flows used in investing activities
Purchases of fixed maturities	(9,795)	(4,181)
Proceeds from sales of fixed maturities	8,317	3,578
Proceeds from maturities of fixed maturities	240	206
Net purchases, sales and maturities of short-term investments	(17)	(64)
Purchases of other invested assets	(631)	(725)
Proceeds from the sales and redemptions of other invested assets	775	714
Net purchases and sales of property and equipment	(84)	(66)
Net cash flows used in investing activities	(1,195)	(538)

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

	2014	2013
Cash flows used in financing activities
Dividends paid on common stock	(186)	(166)
Dividends paid on non-controlling preferred stock	(44)	(44)
Purchase of treasury stock	(42)	-
Net cash flows used in financing activities	(272)	(210)
Net (decrease)/increase in cash and cash equivalents	(883)	29

Effect of exchange rate changes	(50)	(16)
Cash and cash equivalents - beginning of year	1,890	1,877
Cash and cash equivalents - end of year	957	$1,890

Supplementary cash flow information
Taxes paid	$94	$19
Interest paid	$3	$4

Cash and cash equivalents comprise the following:
Cash at bank and in hand	$543	$691
Cash equivalents	$414	$1,199

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 2014 and 2013

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.

With effect from 2014, deposits managed centrally by Lloyd's are included in fixed maturities, whereas previously they were reported as cash and cash equivalents. This revised presentation is considered a more appropriate reflection of the underlying investments. A reclassification to the value of $401 million has been made to the balance sheet at 31 December 2013 to reflect this change. Certain other insignificant prior year reclassifications, have been made to conform to the 2014 presentation. These reclassifications have no impact 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. Equity 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 are recognised at the time an applicable insured event occurs and are fully earned when recognised.

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 at the time an applicable insured event occurs and are fully expensed when recognised.

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 2014 against the deterioration of loss reserves relating to the Group's 2011 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 net income in the Consolidated Income Statements.

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 conditions in effect on that date, most notably the share price and the exchange rate. This value 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.

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

In May 2014, the Financial Accounting Standards Board ('FASB') issued Accounting Standards Update ('ASU') No. 2014-09, Revenue from Contracts with Customers, providing a new model for revenue recognition for most companies. The accounting for insurance contracts, investment income and topics covered by other GAAP are not amended by this guidance. The update will be effective for the Group from the beginning of 2017. Early application is not permitted. Under the new model an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires additional disclosures about revenue. Catlin is currently evaluating the impact of this guidance on the Company's financial position and results of operations.

In June 2014 the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures. Accounting changes for repurchase-to-maturity transactions and repurchase financings along with disclosures for transactions accounted for as a sale are effective for the Group from the beginning of 2015. Disclosure requirements for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are first required for the Group in the 2015 year-end financial statements. Early application is not permitted. Under the new requirements, repurchase-to-maturity transactions will be accounted for as secured borrowings, as will repurchase financing arrangements. The update also requires enhanced disclosures for these transactions as well as for repurchase agreements and securities lending activities. Catlin is currently evaluating the impact of this guidance and does not expect a significant impact on the Company's financial position and 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 2014 there were four significant intra-Group reinsurance contracts in place: a 40 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 5.5 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 86 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 2014 is as follows:

(US dollars in millions)	London	Bermuda	US	International	Total
Gross premiums written	$2,763	$577	$1,374	$1,252	$5,966

Net premiums earned	1,895	449	937	879	4,160
Losses and loss expenses	(905)	(154)	(596)	(528)	(2,183)
Policy acquisition costs	(463)	(107)	(212)	(204)	(986)
Net underwriting contribution	$527	$188	$129	$147	$991

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

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 2014 and 2013 are as follows:

(US dollars in millions)	2014	2013
US government and agencies	$1,447	$609
Non-US governments	1,867	1,860
Corporate securities	2,733	2,298
Asset-backed securities	637	1,040
Mortgage-backed securities	830	645
Interest rate derivative contracts	-	6
Credit default derivative contracts	(3)	(3)
Total fixed maturities	$7,511	$6,455

$794 million (2013: $545 million) of the total mortgage-backed securities at 31 December 2014 is represented by investments in Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and National Credit Union Administration bonds.

With effect from 2014, deposits managed centrally by Lloyd's are included in fixed maturities, whereas previously they were reported as cash and cash equivalents. The value of these deposits at 31 December 2014 was $353 million (2013: $401 million). 2013 amounts have been revised accordingly.

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

		2014		2013
(US dollars in millions)	Fair value	%	Fair value	%
US government and agencies	$1,447	19	$609	9
Non-US governments	1,867	25	1,860	29
AAA	1,311	18	1,592	25
AA	1,664	22	1,372	21
A	1,004	13	809	13
BBB and other	221	3	210	3
Interest rate derivative contracts	-	-	6	-
Credit default derivative contracts	(3)	-	(3)	-
Total fixed maturities	$7,511	100	$6,455	100

Fixed maturities at 31 December 2014 and 2013, 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.

(US dollars in millions)	2014	2013
Due in one year or less	$741	$477
Due after one through five years	4,029	3,244
Due after five years through ten years	1,016	898
Due after ten years	261	148
	6,047	4,767
Asset-backed securities	637	1,040
Mortgage-backed securities	830	645
Interest rate derivative contracts	-	6
Credit default derivative contracts	(3)	(3)
Total fixed maturities	$7,511	$6,455

The Group did not have an aggregate investment with a single counterparty in excess of 10 per cent of total investments at 31 December 2014 and 2013.

Other invested assets

Other invested assets by category at 31 December 2014 and 2013 are as follows:

(US dollars in millions)	2014	2013
Hedge funds	$11	$22
Equity funds	97	73
Equity securities	233	353
Loan instruments	238	199
Equity market derivative contracts	2	5
Other invested assets at fair value	581	652
Equity method investments	23	36
Total other invested assets	$604	$688

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 $158 million of quoted equity securities, and $75 million of private equity.

Loan instruments comprise holdings in syndicated loans and other unquoted private debt, including $79 million in relation to loan advances made to Box Innovation Group Ltd.

There are unfunded commitments related to investments in funds of $132 million as at 31 December 2014 (2013: $80 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 2014, 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 $2 million (2013: $3 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 2014 and 2013 are as follows:

(US dollars in millions)	2014	2013
Investment income	$134	$127
Net gains/(losses) on fixed maturities and short-term investments	30	(94)
Net gains on other invested assets	77	102
Total investment return	241	135
Investment expenses	(15)	(11)
Net investment return	$226	$124

The Group has elected to apply the fair value option to its fixed maturity securities and short-term investments. In 2014, net gains from fair value changes in these items were $30 million (2013: $94 million losses).

Gains in 2014 on fixed maturities and short-term investments still held at 31 December 2014 were $55 million (2013: $88 million loss). Gains in 2014 on other invested assets still held at 31 December 2014 were $32 million (2013: $34 million gain).

Net gains on other invested assets include $31 million in relation to Box Innovation Group Ltd.

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. With effect from 2014, the Group has extended its disclosed restricted assets to include balances held to support intragroup reinsurance activities. 2013 amounts have been revised accordingly.

The total value of these restricted assets by category at 31 December 2014 and 2013 is as follows:

(US dollars in millions)	2014	2013
Fixed maturities	$4,221	$4,037
Short-term investments	56	60
Cash and cash equivalents	185	518
Total restricted assets	$4,462	$4,615

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 $1 million (2013: $9 million) of securities on loan at 31 December 2014.

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 swap and option 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/(losses) 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 swap and option contracts are included in net investment return together with related gains/(losses) 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. 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/(losses) 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 2014 and 2013 are as follows:

			2014			2013
(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	$2	$(2)	$-	$15	$(9)	$6
Credit default contracts	-	(3)	(3)	-	(3)	(3)
Equity market contracts	2	-	2	6	(1)	5
Foreign exchange contracts	-	-	-	1	-	1
Total derivatives	$4	$(5)	$(1)	$22	$(13)	$9

Cash collateral related to derivatives not offset in the balance sheet was $22 million at 31 December 2014 (2013: $19 million).

The notional values of open derivatives at 31 December 2014 and 2013 are as follows:

	Notional value
(US dollars in millions)	2014	2013
Interest rate options	$200	$200
Interest rate swap contracts	2,349	1,341
Credit default swap option contracts	750	1,100
Credit default swap contracts	33	33
Equity market option contracts	176	298
Foreign exchange contracts	234	17

The net gains/(losses) on derivatives at 31 December 2014 and 2013 are as follows:

(US dollars in millions)	2014	2013
Interest rate contracts	$(49)	$-
Credit default contracts	(4)	(13)
Equity market contracts	4	5
Foreign exchange contracts	(2)	(1)
Net losses on derivatives	$(51)	$(9)

The derivatives contracts held by the Group at 31 December 2014 contain no contingent features related to the Group's credit risk.

During 2014 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 protection of the credit risk in our portfolio. Equity market derivative contracts were utilised for both tail risk protection and efficient portfolio management.

6 Fair value measurement

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

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

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

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

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

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

Assets utilising Level 3 inputs include: investments in funds with significant redemption restrictions; unquoted private equity and debt not qualifying as Level 2; collateralised debt obligations ('CDO'); and sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs reflect individual assumptions and 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 judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorised in Level 3. The Group uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels.

Assets and liabilities measured at fair value on a recurring basis

The table below shows the values at 31 December 2014 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 2014	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
US government and agencies	$1,447	$816	$631	$-
Non-US governments	1,867	-	1,867	-
Corporate securities	2,733	-	2,711	22
ABS	637	-	637	-
RMBS	827	-	815	12
CMBS	3	-	3	-
Credit default derivative contracts	(3)	-	(3)	-
Total fixed maturities	7,511	816	6,661	34
Short-term investments	203	65	138	-
Other invested assets at fair value	581	158	153	270
Total assets at fair value	$8,295	$1,039	$6,952	$304

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	$609	$133	$476	$-
Non-US governments	1,860	-	1,860	-
Corporate securities	2,298	-	2,288	10
ABS	1,040	-	1,012	28
RMBS	586	-	537	49
CMBS	59	-	47	12
Interest rate derivative contracts	6	-	6	-
Credit default derivative contracts	(3)	-	(3)	-
Total fixed maturities	6,455	133	6,223	99
Short-term investments	184	54	130	-
Other invested assets at fair value	652	293	187	172
Foreign exchange derivative contracts	1	-	1	-
Total assets at fair value	$7,292	$480	$6,541	$271

The changes in the year ended 31 December 2014 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

(US dollars in millions)	Total	Corporate	ABS	RMBS	CMBS	Other invested assets
Balance, 1 January 2014	$271	$10	$28	$49	$12	$172
Total net gains included in income	35	1	-	1	2	31
Acquisitions	166	13	-	7	-	146
Disposals	(168)	(2)	(28)	(45)	(14)	(79)
Balance, 31 December 2014	$304	$22	$-	$12	$-	$270

Amount of gains/(losses) relating to balances still held at year end	$26	$1	$-	$-	$-	$25

There were no assets transferred into or out of Level 3 during 2014.

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	Corporate	ABS	RMBS	CMBS	Other invested assets
Balance, 1 January 2013	$233	$16	$24	$41	$6	$146
Total net gains included in income	34	7	-	3	1	23
Acquisitions	133	29	17	25	8	54
Disposals	(99)	(12)	(13)	(20)	(3)	(51)
Transfers out of Level 3	(30)	(30)	-	-	-	-
Balance, 31 December 2013	$271	$10	$28	49	$12	$172

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.

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 include loan amounts advanced to Box Innovation Group Ltd, ('BIGL', trading as insurethebox) in which the Group also holds an equity investment accounted for under the equity method. In December 2014, the Group entered into an agreement to dispose of its investment in BIGL, subject to regulatory approval. The fair value of the loan balance with BIGL at 31 December 2014 has been determined by management, taking into consideration the proportion of the agreed proceeds attributable to the loan amounts. The loan balance was valued at $79 million at 31 December 2014, and contributed a gain of $31 million to the Group's total investment return for 2014.

The Group's remaining 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 2014, the fair value of the subordinated debt was $84 million, which compared to a carrying value of $90 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 judgments. The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in earnings in the period in which the estimates are changed. Management believes that they have made a reasonable estimate of the level of reserves at 31 December 2014 and 2013.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2014 and 2013 is as follows:

(US dollars in millions)	2014	2013
Gross unpaid losses and loss expenses, beginning of year	$6,709	$6,686
Reinsurance recoverable on unpaid losses and loss expenses	(1,336)	(1,400)
Net unpaid losses and loss expenses, beginning of year	$5,373	$5,286
Net incurred losses and loss expenses for claims related to:
Current year	2,303	2,230
Prior years	(120)	(167)
Total net incurred losses and loss expenses	2,183	2,063
Net paid losses and loss expenses for claims related to:
Current year	(701)	(589)
Prior years	(1,472)	(1,414)
Total net paid losses and loss expenses	(2,173)	(2,003)
Foreign exchange and other	(129)	27
Net unpaid losses and loss expenses, end of year	5,254	5,373
Reinsurance recoverable on unpaid losses and loss expenses	1,451	1,336
Gross unpaid losses and loss expenses, end of year	$6,705	$6,709

As a result of the changes in estimates of insured events in prior years, the 2014 reserves for losses and loss expenses net of reinsurance recoveries decreased by $120 million (2013: $167 million). Reserve Releases have resulted from changes in reserving estimates across the Casualty, Energy and Marine and Reinsurance Product Groups. The releases in the Reinsurance Product Group have resulted from improvements in the Casualty Reinsurance offset by deteriorations in Property Treaty from Costa Concordia and the New Zealand Earthquakes.

8 Reinsurance

			2014			2013
(US dollars in millions)	Premiums written	Premiums earned	Losses incurred	Premiums written	Premiums earned	Losses incurred
Direct	$3,735	$3,491	$1,958	$3,343	$3,226	$1,577
Assumed	2,231	2,059	905	1,966	1,920	972
Ceded	(1,621)	(1,390)	(680)	(1,257)	(1,198)	(486)
Net premiums	$4,345	$4,160	$2,183	$4,052	$3,948	$2,063

The Group's reinsurance recoverable on unpaid and paid losses as at 31 December 2014 and 2013 is as follows:

(US dollars in millions)	2014	2013
Gross reinsurance recoverable	$1,728	$1,509
Provision for uncollectible balances	(23)	(29)
Net reinsurance recoverable	$1,705	$1,480

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 2014 there were five counterparties which accounted for 5 per cent or more of the total reinsurance recoverable balance.

	% of reinsurance recoverable	Security
Munich Re	20%	A+ (A.M. Best)
Syndicate 6111 (Catlin Names SPS)	10%	A (A.M. Best)
Syndicate 2088 (China Re SPS)	6%	A (A.M. Best)
Partner Re	6%	A (A.M. Best)
Transatlantic Re	5%	A (A.M. Best)

The Syndicate 6111 and Syndicate 2088 contracts both operate on a funds-withheld basis.

9 Subordinated debt

The Group's outstanding subordinated debt as at 31 December 2014 and 2013 consisted of the following:

(US dollars in millions)	2014	Rate of return %	2013	Rate of return %
Variable rate, face amount €7, due 15 March 2035	$9	3.23	$10	3.13
Variable rate, face amount $27, due 15 March 2036	27	3.44	27	3.49
Variable rate, face amount $31, due 15 September 2036	31	3.37	31	3.42
Variable rate, face amount $10, due 15 September 2036	10	3.27	10	3.32
Variable rate, face amount €11, due 15 September 2036	13	3.23	15	3.17
Total subordinated debt	$90		$93

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 2014 and 2013 consist of the following:

(US dollars in millions)	2014	2013
Goodwill	$80	$80
Indefinite life intangibles	640	640
Total intangible assets and goodwill	$720	$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 2014 and 2013, 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.

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. Similar arrangements exist for Lloyd's Members in Singapore, Canada and Japan under which Lloyd's calculate and remit income taxes directly to the local tax authorities and charge the expense to Members accordingly.

The Group's Corporate Members are all subject to these Lloyd's tax arrangements but, as UK tax residents, will receive UK corporation tax credits for any foreign income tax incurred up to the value of the equivalent UK corporation tax charged on the foreign income.

United States

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

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 2014 and 2013 is as follows:

(US dollars in millions)	2014	2013
Current tax expense	$157	$28
Deferred tax benefit	(123)	(12)
Change in uncertain tax positions	(8)	-
Rate change on deferred tax	-	(20)
Expense/(benefit) for income taxes	$26	$(4)

The effective tax rate for the Group is 5.3 per cent (2013: 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 2014 and 2013 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)	2014	2013
Expected tax benefit at weighted average rate	$(2)	$(34)
Permanent differences:
Disallowed expenses and losses not recognised	16	49
Prior year adjustments including changes in uncertain tax positions	(5)	1
Rate change	-	(20)
Adjustment to taxable income	17	-
Expense/(benefit) for income taxes	$26	$(4)

The components of the Group's net deferred tax liability as at 31 December 2014 and 2013 are as follows:

(US dollars in millions)	2014	2013
Deferred tax assets:
Net operating loss carry forwards	$17	$40
Foreign tax credits	17	65
Capital allowances	12	11
Other timing differences	72	47
Valuation allowance	(69)	(65)
Total deferred tax assets	$49	$98
Deferred tax liabilities:
Untaxed profits	(15)	(146)
Intangible assets arising on business combination	(73)	(73)
Syndicate capacity	(20)	(19)
Total deferred tax liabilities	$(108)	$(238)
Net deferred tax liability	$(59)	$(140)

As at 31 December 2014 the Group had operating tax losses carried forward of $120 million (2013: $186 million) which are available to offset future taxable income. The potential deferred tax asset on these losses is $17 million. However, the Group has recognised a full valuation allowance of $13 million against the losses carried forward in the UK and Luxembourg and a partial valuation allowance against those losses in Switzerland. Consequently, the Group has only recognised a net deferred tax asset of $4 million in respect of operating losses carried forward. The remaining component of the total valuation allowance of $69 million is made up of $56 million in respect of other timing differences arising in the US entities.

Uncertain tax positions

As at 31 December 2014 the liability amount of uncertain tax benefits was $7 million (2013: $15 million).

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

(US dollars in millions)	2014	2013
Unrecognised tax benefits balance at 1 January	$15	$15
Gross decrease in tax positions of prior years	(8)	-
Unrecognised tax benefits balance at 31 December	$7	$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 2014 or 2013 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	2012-2014
United States	2011-2014
Switzerland	2012-2014

12 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2014 and 2013:

	2014	2013
Common stock, par value $0.01
Authorised	500,000,000	500,000,000

Issued	362,559,871	362,053,537
Stock held by Employee Benefit Trust	(3,504,016)	(4,286,374)
Outstanding	359,055,855	357,767,163

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 2014 and 2013:

	2014	2013
Balance, 1 January	362,053,537	361,824,004
Exercise of stock options	506,334	229,533
Balance, 31 December	362,559,871	362,053,537

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. During 2014, the Group through the EBT purchased 4,661,154 of the Group's shares at an average price of $8.80 (£5.27) per unit. The total amount paid for treasury stock of $42 million is shown as a deduction to stockholders' equity. The cumulative cost of shares held by the EBT of $39 million is shown as a deduction to stockholders' equity.

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 20 March 2014 the Group paid a final dividend on the common stock relating to the 2013 financial year of 21.0 pence per share (34.3 cents per share) to stockholders of record at the close of business on 21 February 2014. The total dividend paid for the 2013 financial year was 31.0 pence per share (49.8 cents per share).

On 22 September 2014, the Group paid an interim dividend relating to the 2014 financial year of 10.5 pence per share (17.7 cents per share) to stockholders of record on 22 August 2014.

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

The Group has several employee schemes in place, of which the most significant are the Performance Share Plan ('PSP') and the Incentive Share Plan ('ISP'). From 2014, awards are made under the PSP adopted in 2013. This replaces the previous PSP, adopted in 2004, under which awards were made in 2013 and prior years. The first ISP awards were made in 2014. In addition, the Group also has a Deferred Bonus Share Plan and three Employee Share Plans in place. 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 2014 was $60 million (2013: $50 million), included in administrative and other expenses.

Performance Share Plan

In February 2014, Standard Awards comprising a total of 3,896,040 options with $nil exercise price and 1,479,398 non-vested shares (total of 5,375,438 securities) were awarded to Group employees under the PSP. In August 2014, a further 60,085 options with $nil exercise price and 67,321 non-vested shares (total of 127,406 securities) were awarded, resulting in a total of 5,502,844 securities granted to Group employees under the PSP in 2014. Up to half of the securities will vest in 2017 and up to half will vest in 2018, subject to certain performance conditions. Additional Awards comprising 183,705 options with $nil exercise price were also granted. Up to half of these securities will vest in 2017 and up to half will vest in 2018, subject to certain market-based 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 0-6 per cent depending on the award. This value is charged to the Consolidated Income Statements over the vesting period, with a corresponding adjustment to equity. The charge 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 total amount of expense relating to PSP for the year ended 31 December 2014 was $53 million (2013: $50 million).

Incentive Share Plan

In February 2014 a total of 2,168,384 options with $nil exercise price and 869,670 non-vested shares (total of 3,038,054 securities) were awarded to Group employees under the Group's Incentive Share Plan ('ISP'). In August 2014, a further 56,319 options with $nil exercise price and 5,722 non-vested shares (total of 62,041 securities) were awarded, resulting in a total of 3,100,095 securities granted to Group employees under the ISP in 2014. Half of the securities will vest in 2017 and half will vest in 2018, subject to continued service.

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 5 per cent. This value is charged to the Consolidated Income Statements over the vesting period, with a corresponding adjustment to equity. The charge is revised at each balance sheet date to take account of any changes that may be required to the attrition assumption. The total amount of expense relating to ISP for the year ended 31 December 2014 was $7 million (2013: $nil).

The table below shows the PSP and ISP awards as at 31 December 2014 and activity during 2014.

	PSP Standard Awards		PSP Additional Awards		ISP Awards
	Number of awards	Weighted average fair value	Number of awards	Weighted average fair value	Number of awards	Weighted average fair value
Outstanding, 1 January 2014	35,645,656	$9.64	-	-	-	-
Granted during year	5,502,844	$9.18	183,705	$5.85	3,100,095	$9.18
Forfeited during year	(6,757,674)	$8.79	-	-	(161,583)	$8.79
Exercised during year	(3,948,209)	$8.79	-	-	-	-
Outstanding, 31 December 2014	30,442,617	$10.47	183,705	$7.97	2,938,512	$10.47
Exercisable, end of year	1,208,094	$10.47	-	-	-	-

The total fair value of PSP Standard Awards vested during the year was $35 million (2013: $42 million).

The following table provides further information on the PSP and ISP securities as at 31 December 2014.

(US dollars in millions)	PSP Standard Awards	PSP Additional Awards	ISP Awards
Weighted average remaining contractual life	8 years	9 years	9 years
Maximum contractual term of equity share options	9 years	9 years	9 years
Weighted average period of recognition	1 years	3 years	3 years
Future compensation relating to unvested awards	$54	$0.2	$17

Under the terms of the Deferred Bonus Share Plan, any bonus award exceeding 130 per cent of base salary is deferred into shares. In March 2014, conditional rights to acquire 113,958 shares were awarded on this basis. These are eligible to vest in equal proportions in 2017, 2018 and 2019.

The Group also has three All-Employee Share Plans in place. The expense related to the All-Employee Share Plans is considered to be insignificant.

14 Earnings per share

Basic earnings per share are 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) ISP;

(iii) Deferred Bonus Shares; and

(iv) All-Employee Share Plans.

Income to common stockholders is arrived at after deducting non-controlling preferred stock dividends of $44 million (2013: $44 million).

Reconciliations of the number of shares used in the calculations as at 31 December 2014 and 2013 are set out below.

	2014	2013
Weighted average number of shares	358,487,807	355,350,786
Dilution effect of stock options and non-vested shares	17,653,686	8,461,337
Weighted average number of shares on a diluted basis	376,141,493	363,812,123

Earnings per common share
Basic	$1.17	$1.11
Diluted	$1.11	$1.08

With effect from 2014, securities awarded under the PSP were included in the computation of diluted earnings per share to the extent that the full term performance conditions necessary for these securities to vest were met as at 31 December. The 2013 comparatives have been revised on this basis.

15 Other comprehensive income/(loss)

The following table details the individual components of other comprehensive income/(loss) for 2014 and 2013:

(US dollars in millions)		Amount before tax		Tax (expense)/benefit		Amount after tax
2014
Cumulative translation adjustments		$(41)		$(3)		$(44)
Defined benefit pension plan		1		-		1
Other comprehensive income/(loss)		$(40)		$(3)		$(43)
2013
Cumulative translation adjustments	$(14)		$8		$(6)
Defined benefit pension plan	-		-		-
Other comprehensive income/(loss)	$(14)		$8		$(6)

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

(US dollars in millions)	2014	2013
Cumulative translation adjustments	$(247)	$(203)
Funded status of defined benefit pension plan adjustment	4	3
Accumulated other comprehensive loss	$(243)	$(200)

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 $16 million for the year ended 31 December 2014 (2013: $14 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 2014 (2013: $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 2014 (2013: $6 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 2014 (2013: $2 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 2014 were $29 million (2013: $29 million) and fair value of plan assets was $34 million (2013: $32 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 2014 and 2013.

Pension costs for pension schemes in other countries of operation are considered individually insignificant but in aggregate amount to $5 million (2013: $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. The regulatory requirements shown in the table below are based on the latest available data:

US dollars in millions	2014	2013
United Kingdom	$201	$183
United States	129	109
Switzerland	1,148	1,231
Bermuda	463	792

The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,178 million (2013: $1,352 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 2014, 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 2014, $197 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 2014, $166 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 2014, $48 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 $375 million. As at 31 December 2014, $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 ($41 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 2014, Australian $49 million ($40 million) of letters of credit were issued under this facility.

· Two unsecured bilateral facilities, available for utilisation by appointed members of the Group and guaranteed by the Company amounting to $150 million. As at 31 December 2014, $109 million of letters of credit were issued under this facility.

· A facility managed by Lloyd's, acting for the Syndicates. As at 31 December 2014, $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 2014 are as follows:

(US dollars in millions)
2015	$28
2016	26
2017	22
2018	21
2019 and thereafter	87
Total	$184

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $13 million (2013: $22 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 2014 and 2013 was insignificant to the Group Financial Statements.

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

20 Subsequent events

Recommended acquisition

On 9 January 2015, the Group announced that it had agreed the terms of a recommended cash and share acquisition of the entire issued and to be issued share capital of the Company by XL Group plc ('XL'), a company domiciled in Ireland and listed on the New York Stock Exchange and the Bermuda Stock Exchange. It is intended that the acquisition will be effected by means of a two-step, integrated process comprising a scheme of arrangement under Section 99 of the Bermuda Companies Act followed immediately by a merger under Section 104H of the Bermuda Companies Act.

The acquisition provides for a consideration of 388 pence in cash and 0.130 XL shares for each share in the Company, subject to a mix and match arrangement, plus the 2014 final dividend of 22 pence. In addition, subject to the completion of the disposal of Catlin's investment in Box Innovation Group Limited, it has been announced that Catlin shareholders will receive a special dividend of approximately 12 pence per share.

The acquisition is conditional on, among other things, the approval of Catlin shareholders, the sanction of the Scheme by the Supreme Court of Bermuda and clearances from regulators

The terms of the recommended acquisition did not result in any impact on the Group's financial position or results of operations, at or for the year ended 31 December 2014.

Proposed dividend

On 9 February 2015 the Board approved a proposed final dividend of 22.0 pence per share (33.5 cents per share), payable on 19 March 2015 to stockholders of record at the close of business on 20 February 2015. 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 2015.

Management has evaluated subsequent events until 11 February 2015, the date of issuance of the financial statements.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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