Half Yearly Report

RNS Number : 6442Q

Catlin Group Limited

06 August 2010

 



6 August 2010

CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR SIX MONTHS ENDED 30 JUNE 2010

HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), the international specialty property/casualty insurer and reinsurer, announces its financial results for the six months ended 30 June 2010.

Financial Highlights

·     US$86 million in profit before tax (30 June 2009: US$240 million); includes US$49 million in foreign exchange losses (of which only US$8 million is a realised loss)

·     US$227 million in net underwriting contribution¹ (30 June 2009: US$246 million); US$362 million in net underwriting contribution if catastrophe losses relating to Chilean earthquake are excluded

·     11 per cent increase in gross premiums written to US$2.5 billion (30 June 2009: US$2.2 billion)

·     21 per cent increase in net premiums earned to US$1.6 billion (30 June 2009: US$1.3 billion), of which one-third is attributable to embedded growth from the Wellington acquisition

·     Non-London hubs produced 43 per cent of gross premiums written (30 June 2009: 35 per cent); non-London hubs produced 63 per cent of net underwriting contribution (30 June 2009: 41 per cent)

·     51 per cent attritional loss ratio was lowest in four years (30 June 2009: 54 per cent)

·     97 per cent combined ratio (30 June 2009: 93 per cent),  of which 9 per cent relates to Chilean earthquake losses

·     1.8 per cent total investment return produced during period by defensively positioned asset portfolio (30 June 2009: 2.9 per cent)

·     5 per cent increase in interim dividend to 8.6 pence (13.7 US cents) per share (30 June 2009: 8.2 pence; 13.8 US cents)

·     26 per cent increase in net tangible assets per share in sterling over past 12 months; 14 per cent increase in net tangible assets per share in US dollars

Operational Highlights

·     All underwriting hubs producing meaningful underwriting contributions despite catastrophe losses

·     Disciplined growth in challenging market conditions; average weighted premium rates flat across Group's underwriting portfolio

·     33 per cent expense ratio, unchanged from first half of 2009

·     Superior portfolio diversification through Catlin's global underwriting structure

·     Diversification to be further enhanced by launch of Catlin Re Switzerland during fourth quarter of 2010

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

US$m		30 June 2010	30 June 2009
Gross premiums written		2,461	2,217
Net premiums written		1,893	1,773
Net premiums earned		1,572	1,298
Net underwriting contribution1		227	246
Total investment return		140	198
Net income before income taxes		86	240
Net income to common stockholders		57	196
Earnings per share (US dollars)		0.17	0.62
Interim dividend per share (pence)		8.6	8.2
Interim dividend per share (US cents)		13.7	13.8
Loss ratio		64.9%	60.3%
Expense ratio2		32.6%	32.8%
Combined ratio2		97.5%	93.1%
Investment return for period		1.8%	2.9%
Annualised return on net tangible assets3		5.6%	28.2%
Annualised return on equity3		4.3%	20.1%
	30 June 2010	30 June 2009	31 Dec 2009
Total assets	12,063	11,985	11,682
Investments and cash	7,536	7,053	7,693
Stockholders' equity	3,194	3,006	3,278
Unearned premiums	2,251	2,154	1,724
Net tangible assets per share (sterling)4	£3.88	£3.09	£3.64
Net tangible assets per share (US dollars) 4	$5.78	$5.09	$5.90
Book value per share (sterling) 4	£5.09	£4.18	£4.74
Book value per share (US dollars) 4	$7.58	$6.90	$7.68

1	Net underwriting contribution is defined as net premiums earned less losses and loss expenses and policy acquisition costs.
2	The expense ratio and the combined ratio include policy acquisition costs and most administrative expenses.  These ratios exclude profit-related bonuses, employee share option schemes, certain Group corporate costs, investment costs and financing costs.
3	Returns on net tangible assets and equity exclude preferred shares and are calculated by reference to opening balances (adjusted for capital issued during the year).
4	Book value and net tangible assets per share exclude preferred shares and treasury shares.

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

"I am pleased with the Group's performance during the first half of 2010.  Catlin's underwriting operations produced strong underlying results, as the attritional loss ratio in the first half was the lowest in four years.  However, our profits were reduced by record first-half catastrophe losses and adverse foreign exchange movements.  Our results were also impacted by the Deepwater Horizon loss, but as a leading energy underwriter the Group is well-positioned to benefit from improved rates and increased demand.

"Our non-London underwriting hubs continued to grow, both in terms of premium volume and underwriting profits, with more than 60 per cent of the Group's net underwriting contribution produced outside London.  The diversification provided by our international operations provides us with flexibility and a source of future profitable growth in a challenging marketplace.

"We have increased the interim dividend by 5 per cent, which reflects the strength of our business model and the Board's confidence in the Group's prospects."

- ends -

For more information contact:

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

Notes to editors:

1.	Catlin Group Limited, headquartered in Bermuda, is an international specialist property/
2.	casualty insurer and reinsurer writing more than 30 classes of business 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.
3.	Catlin's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP').  The Group reports in US dollars.
4.	Catlin management will make a presentation to investment analysts at 10am GMT today at the Group's London office.  The presentation will be broadcast live on the Group's website (www.catlin.com).  The webcast will also be available on demand later today.
5.	Rates of exchange at 30 June 2010 - balance sheet:  £1 = US$1.49 (31 December 2009:
6.	£1 = US$1.62; 30 June 2009: £1 = US$1.65); income statement (average rate): £1 = US$1.53
7.	(31 December 2009: £1 = US$1.56; 30 June 2009: £1 = US$1.50).
8.	Earnings per share are based on weighted average shares in issue of 346 million during the period ended 30 June 2010.  Book value per share is based on 343 million shares in issue at 30 June 2010.  Both calculations exclude Treasury Shares held in trust.
9.	Detailed information regarding Catlin's operations and financial results for the period ended 30 June 2010 is attached, including unaudited consolidated financial statements.
10.	Catlin is the title sponsor of the Catlin Arctic Survey, a unique collaboration between polar explorers and research scientists to improve society's knowledge of potential environmental changes.  Catlin Arctic Survey 2010, which concluded in May, focused on how rising carbon emissions may affect oceans and sea life.  More information is available at CatlinArcticSurvey.com.

Catlin performed well during the six months ended 30 June 2010 despite competitive market conditions for many of the classes of business we underwrite, reduced investment returns and record first-half catastrophe losses caused by the Chilean earthquake in February.

Our underwriting performance was strong, despite the challenging environment.  Whilst gross premiums written increased by 11 per cent and net premiums earned by 21 per cent, we continued to underwrite selectively, seeking profit over volume.  The Group's net underwriting contribution amounted to US$227 million, a reduction of only 8 per cent (30 June 2009: US$246 million).  Excluding losses from the Chilean earthquake, Catlin's underwriting contribution increased by 47 per cent compared with the first half of 2009.  The attritional loss ratio - excluding catastrophe and large single-risk losses - improved to 50.7 per cent, the lowest in the past four years (30 June 2009: 54.0 per cent).  Average weighted premium rates across the entire portfolio were flat.

Our underwriting hubs outside London continued to grow, both in terms of premium volume and profit.  Gross premiums written by the Bermuda, US and International hubs increased 34 per cent to US$1.1 billion (30 June 2009: US$786 million).  More importantly, these hubs' underwriting contribution rose by 42 per cent to US$143 million (30 June 2009: US$101 million).  This performance demonstrates the value of the portfolio diversity generated by Catlin's global underwriting structure, particularly during a period in which rates for many classes of London wholesale business were under pressure.

In the first half, 43 per cent of gross premiums written and 63 per cent of underwriting contribution was produced by the non-London hubs (30 June 2009: 35 per cent and 41 per cent, respectively).  We regard our structure and the diversification it provides as a true competitive advantage.

The formation of Catlin Re Switzerland, announced in June, will further diversify our risk portfolio.  Subject to regulatory approval, Catlin Re Switzerland is expected to commence operations in the fourth quarter of 2010 to underwrite European specialty reinsurance that our existing operations do not currently write.  Our initial focus will be on classes - Trade Credit, Political Risk and Surety Reinsurance - for which underwriting conditions are currently favourable.  We will selectively enter additional classes of European reinsurance business as other profitable opportunities emerge.

Our investment portfolio is defensively positioned in response to the continued economic uncertainty.  The total investment return during the first half was 1.8 per cent (30 June 2009: 2.9 per cent); in dollar terms total investment return amounts to US$140 million (30 June 2009: US$198 million).  This was a good performance in the light of the market environment and the limited risk the Group is taking.

Despite the Group's strong underlying performance, profit before tax decreased to US$86 million (30 June 2009: US$240 million), and net income to common stockholders amounted to US$57 million (30 June 2009: US$196 million).  The reduction was due to the catastrophe losses, reduced investment return and US$49 million in foreign exchange losses, of which only $8 million is a realised loss.

Dividend

The Board of Directors has declared an interim dividend of 8.6 pence per share (13.7 US cents), payable on 24 September 2010 to shareholders of record on 27 August 2010.  This represents a 5 per cent increase over the interim 2009 dividend of 8.2 pence (13.8 US cents), reflecting the strength of our business and the Board's confidence in the Group's future prospects. 

Since the Group's initial public share offering in 2004, the interim dividend has increased more than 125 per cent per share (restated for the impact of the 2009 Rights Issue).

Financial Review

Gross premiums written

Gross premiums written in the six-month period ended 30 June 2010 increased by 11 per cent to US$2.5 billion (30 June 2009: US$2.2 billion).  The increase was also 11 per cent on a constant currency basis.  Gross premiums written by each of the Group's non-London underwriting hubs increased by more than 25 per cent compared with the first half of 2009, which reflects the ongoing opportunities created by the Group's investment in these hubs.  Gross premiums written by the London hub decreased by 2 per cent during the period, as the Group reduced volumes in certain classes due to competitive conditions in the London wholesale market.

The table below shows the development of the Group's gross premiums written by each underwriting hub during prior periods as well as estimated gross premiums written for the full year 2010.

US$m	London	Bermuda	US	International	Group total
H1 2009	1,431	332	267	187	2,217
H1 2010	1,409	419	346	287	2,461
FY 2007	2,605	312	297	147	3,361
FY 2008	2,428	392	348	269	3,437
FY 2009	2,347	421	581	366	3,715
FY 20101	2,300	500	700	500	4,000

1  Estimate

Net premiums earned

Net premiums earned increased by 21 per cent to US$1.6 billion (30 June 2009: US$1.3 billion).  The increase is attributable to premium growth and rate increases during 2009 which were earned in the first half of 2010, as well as the Group's decision to write greater proportions of annual catastrophe-related premium volume during the second half of 2009 and the first half of 2010 to take advantage of a more favourable rating environment.  Approximately one-third of the increase was produced by the embedded growth produced by the acquisition of Wellington Underwriting plc, specifically the cessation in 2009 of the quota share reinsurance of the Catlin Syndicate by third-party Lloyd's Names who formerly provided capacity to Wellington Syndicate 2020.

Losses and loss expenses

Losses and loss expenses increased by 30 per cent to US$1.0 billion (30 June 2009: US$783 million), resulting in loss ratio of 64.9 per cent (30 June 2009: 60.3 per cent).  The increase was primarily due to catastrophe losses arising from the Chilean earthquake, which accounted for 9.3 percentage points of the loss ratio (30 June 2009: nil catastrophe losses).

The Group released US$29 million from prior year loss reserves during the period ended 30 June 2010
(30 June 2009: US$39 million), representing 1 per cent of the Group's net loss reserves at the beginning of the period (30 June 2009: 1 per cent). The reserve release reduced the loss ratio by 1.8 percentage points (30 June 2009: 3.0 percentage points).

Underwriting results

The Group's net underwriting contribution - defined as net premiums earned less losses and loss expenses and policy acquisition costs - decreased 8 per cent to US$227 million (30 June 2009: US$246 million).  The decrease is attributable to catastrophe-related losses arising from the Chilean earthquake.  Excluding these losses, underwriting contribution would have increased by 47 per cent to US$362 million in the first half of 2010.

Further analysis of underwriting results can be found in the Underwriting Review.

Net investment return

Total investment return for the period, excluding investment expenses, for the period was 1.8 per cent (30 June 2009: 2.9 per cent) and amounted to US$140 million (30 June 2009: US$198 million). Net investment return, after deducting investment expenses, amounted to US$137 million (30 June 2009: US$195 million).

Commentary regarding investment performance and strategy can be found in the Investment Review.

Net losses on foreign currency

Net losses on foreign currency amounted to US$49 million (30 June 2009: US$11 million gain). Of this amount, only US$8 million was realised during the period.

Policy acquisition costs, administrative and other expenses

The Group's expense ratio decreased to 32.6 per cent (30 June 2009: 32.8 per cent).  An analysis of the major components of the expense ratio is shown in the table below.

	30 June 2010	30 June 2009
Policy acquisition costs	20.7%	20.7%
Administrative expenses - non-controllable	2.3%	2.2%
Administrative expenses - hub controllable	6.9%	7.2%
Administrative expenses - Group controllable	2.7%	2.7%
	32.6%	32.8%

Non-controllable expenses include Lloyd's charges and personal performance bonuses.

Other expenses - which include profit-related bonuses, employee share schemes, certain Group corporate expenses, investment expenses and financing costs -  were equivalent to 2.0 percentage points of the expense ratio (30 June 2009: 2.9 per cent).  These expenses are excluded from the expense ratio.

Net income to common stockholders

The table below analyses the major components of net income to common stockholders

US$m	30 June 2010	30 June 2009	% change
Net underwriting contribution	227	246	(8%)
Total investment return	140	198	(29%)
Foreign exchange & other income	(48)	12	NM
Administrative expenses - controllable	(151)	(128)	18%
Administrative expenses - non-controllable	(36)	(29)	24%
Other expenses	(46)	(59)	(22%)
Profit before tax	86	240	(64%)
Income tax expense	(7)	(22)	(68%)
Net income	79	218	(64%)
Preferred share dividend	(22)	(22)	--
Net income to common stockholders	57	196	(71%)

The Group's effective tax rate during the period was 8 per cent (30 June 2009: 9 per cent).  The principal driver of the effective tax rate is the jurisdiction of the underwriting entities in which profits and losses arise.

Annualised return on net tangible assets amounted to 6 per cent (30 June 2009: 28 per cent).  Excluding unrealised foreign exchange losses, annualised return on net tangible assets amounted to 9 per cent during the period.  Annualised return on equity amounted to 4 per cent (30 June 2009: 20 per cent). Excluding unrealised foreign exchange losses, annualised return on equity amounted to 7 per cent during the period.

Balance sheet

Stockholders' equity amounted to US$3.2 billion at 30 June 2010, a 3 per cent decrease during the first half of 2010 (31 December 2009: US$3.3 billion) but a 6 per cent increase during the past 12 months (30 June 2009: US$3.0 billion).

Movements in stockholders' equity during the six-month period are analysed in the table below.

US$m
Stockholders' equity - 1 January 2010	3,278
Net income	79
Currency translation loss	(6)
Employee share plan stock purchase	(52)
Common share dividends	(90)
Preferred share dividends and other	(15)
Stockholders' equity - 30 June 2010	3,194

The table below shows the denomination of the Group's net assets at 30 June 2010:

US$m	Amount	US$	Sterling	Other	Total
Net tangible assets1	1,985	88%	--	12%	100%
Intangible assets	619	89%	11%	--	100%
Net assets1	2,604	88%	3%	9%	100%

1 Excludes preferred shares

Underwriting Review

Rating environment

Average weighted premium rates across the Group's entire portfolio of business were virtually unchanged during the first half of 2010 (30 June 2009: 6 per cent increase).  This good performance in what has been a testing market is attributable to the Group's underwriting appetite, which is driven by profit potential rather than volume-based targets.

Average weighted premium rates for catastrophe-exposed business classes decreased by 1 per cent during the period (30 June 2009: 11 per cent increase), whilst rates for non-catastrophe classes were broadly flat (30 June 2009: 3 per cent increase).

The following table shows movements in the Group's rate indexes for the Group's overall book of business as well as catastrophe and non-catastrophe classes from 1999 through 30 June 2010.

	H1
	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Catastrophe classes	251%	253%	230%	251%	257%	206%	207%	213%	194%	135%	107%	100%
Non-catastrophe classes	195%	194%	188%	190%	200%	205%	208%	201%	176%	136%	103%	100%
All business classes	212%	212%	201%	209%	217%	204%	207%	204%	182%	135%	105%	100%

Note: Index values at 31 December except for 2010

The table below shows changes in average weighted premium rates for each of Catlin's six product groups during the first six months of 2010 and 2009.

	30 June 2010	30 June 2009
Aerospace	0%	3%
Casualty	2%	3%
Energy/Marine	1%	10%
Property	(1%)	4%
Reinsurance	(1%)	10%
Specialty Lines/War & Political Risk	(4%)	1%

Loss experience

The Group recorded a good underwriting performance during the first half of 2010 despite the impact of the Chilean earthquake. The loss ratio at 30 June 2010 amounted to 64.9 per cent (30 June 2009: 60.3 per cent).  However, the attritional loss ratio - which excludes the impact of catastrophe and large single-risk losses and reserve releases - decreased to 50.7 per cent at 30 June 2010 (30 June 2009: 54.0 per cent), the lowest in the past four years. Catastrophe losses, of which the Chilean earthquake is the sole source, accounted for 9.3 percentage points of the first-half 2010 loss ratio. 

The other significant loss incurred by the Group during the period relates to the explosion of  the Deepwater Horizon oil rig in the Gulf of Mexico, which is categorised as a large single-risk loss.  Large single-risk losses, which included several other events, accounted for 6.7 percentage points of the loss ratio in the first half of 2010 (30 June 2009: 9.3 per cent).

The Group's combined losses arising from the Chilean earthquake and Deepwater Horizon are estimated at approximately US$180 million, net of reinsurance and reinstatement premiums, broadly consistent with original estimates.  There is still uncertainty regarding ultimate losses from these two events.

The impact of catastrophe losses, large single-risk losses and reserve releases on the Group's first-half loss ratio over the past four years is show in the table below.

	30 June 2010	30 June 2009	30 June 2008	30 June 2007
Attritional loss ratio	50.7%	54.0%	52.5%	53.5%
Catastrophe losses	9.3%	--	--	--
Large single-risk losses	6.7%	9.3%	7.8%	2.5%
Reserve release	(1.8%)	(3.0%)	(5.7%)	(1.3%)
Reported loss ratio	64.9%	60.3%	54.6%	54.7%

Underwriting performance

The Group's net underwriting contribution decreased 8 per cent to US$227 million (30 June 2009: US$246 million).  Excluding the losses arising from the Chilean earthquake, net underwriting contribution increased 47 per cent to US$362 million.

An analysis of underwriting results by underwriting hub is shown in the table below.

US$m	London	Bermuda	US	International	Group total
Six months ended 30 June 2010
Gross premiums written	1,409	419	346	287	2,461
Net premiums written	1,022	356	270	245	1,893
Net premiums earned	906	216	272	178	1,572
Underwriting contribution	84	54	40	49	227
Loss ratio	69%	55%	68%	53%	65%
Attritional loss ratio	50%	35%	61%	55%	51%
Six months ended 30 June 2009
Gross premiums written	1,431	332	267	187	2,217
Net premiums written	1,075	289	222	187	1,773
Net premiums earned	824	162	182	130	1,298
Underwriting contribution	145	43	68	(10)	246
Loss ratio	60%	52%	46%	93%	60%
Attritional loss ratio	54%	45%	53%	66%	54%

Gross premiums written by the London underwriting hub decreased by 2% during the first half of 2010.  Underwriting discipline was maintained in all classes as the London wholesale market remained competitive. The Group reduced Long-Tail Casualty and Aviation volumes in response to continued concerns over rating levels.  Volumes increased for Property and Property Treaty Reinsurance as the Group wrote a greater proportion of its catastrophe aggregate in the first half of 2010 in anticipation that rates would decrease as the year progressed.  In 2009 Catlin wrote a greater proportion of premiums for these classes in the second half of the year. The 42 per cent decrease in underwriting contribution is attributable to losses arising from the Chilean earthquake and Deepwater Horizon; underwriting contribution would have increased by approximately 8 per cent if the Chilean earthquake losses are excluded.

The Bermuda hub's gross premiums written increased by 26 per cent, the result of similar front-loading of Property Treaty volume in the first half and strong organic growth in non-catastrophe classes.  Bermuda underwriting contribution increased 26 per cent to US$54 million (30 June 2009: US$43 million) despite incurring US$55 million in losses related to the Chilean earthquake, net of reinsurance and reinstatement premiums.  The attritional loss ratio decreased to 35 per cent (30 June 2009: 45 per cent) due to reduced non-catastrophe loss frequency.

The US hub continued to grow, with gross premiums written increasing 30 per cent.  This reflects the continued development of the niche/specialty lines of business written by Catlin US, as well as increased volumes from the US General Aviation facility established in April 2009.  During the period, the hub recruited a new team writing domestic Energy business and launched an environmental liability insurance product.  The attritional loss ratio was negatively impacted by claims arising from the Haitian earthquake on 12 January and planned changes in the mix of business written by the US hub.

Catlin's International underwriting hub - which comprises the Group's offices in the Asia-Pacific region, Europe, Latin America and Canada -  produced an underwriting contribution of US$49 million (30 June 2009: US$10 million loss).  Gross premiums written increased 53 per cent to US$287 million (30 June 2009: US$187 million).  This growth reflects increased traction from underwriting teams within the hubs as well as seeing increased flows of business arising from the Group's presence in Japan, India and China. 

The Group established new international offices during the period in Melbourne, Australia, and Oslo, Norway. The Melbourne office specialises in General Liability and General Aviation insurance, as well as acting as a contact point for other classes of business underwritten by Catlin's Sydney office.  The Oslo office specialises in writing European energy business.

The Group also analyses its performance by category of business written.  An analysis of underwriting performance by Catlin's six product groups for the six-month periods ended 30 June 2010 and 2009 is shown in the table below.

	Gross premiums	Net premiums	Net premiums	Underwriting	Loss
US$m	written	written	earned	contribution	ratio
Six months ended 30 June 20101
Aerospace	191	134	203	30	64%
Casualty	435	345	339	13	81%
Energy/Marine	378	264	219	21	65%
Property	254	177	177	51	42%
Reinsurance	958	773	504	87	66%
Specialty/War & Political Risks	244	234	167	75	34%
Six months ended 30 June 20091
Aerospace	195	145	144	25	62%
Casualty	410	344	303	(8)	84%
Energy/Marine	368	268	203	38	57%
Property	193	120	120	34	38%
Reinsurance	837	718	434	138	48%
Specialty/War & Political Risk	210	194	172	27	65%

1	Product group data excludes effects of Names' quota-share reinsurance of Syndicate 2003 and Syndicate 2020 reserve movements

Gross premiums written for the Aerospace product group decreased 2 per cent in the first half of 2010.  The decrease reflects the Group's continued underwriting discipline in response to the continued erosion of underwriting margins in some classes of Aviation business.  In addition, there was a reduction in satellite launch activity during the period.  In spite of these conditions, Aerospace underwriting contribution increased 20 per cent during the period.

Casualty gross premiums written increased 6 per cent during the period, although this increase was exacerbated by a change in the accounting treatment during the period of multi-year casualty policies.  Concerns still exist regarding pricing for Long-Tail Casualty business, and the Group continues to exercise caution in writing this class of business, with net premiums earned decreasing during the first half.  Catlin remains well-positioned to take advantage of rate corrections for this class of business when they do occur.

The Group continued to increase volumes for Short-Tail Casualty classes, such as financial and niche professional lines, where market conditions are more attractive.

Gross premiums written by the Energy & Marine Product Group increased 3 per cent.  This product group was significantly impacted by the Deepwater Horizon explosion.  The Group had reduced Offshore Energy volume prior to the explosion in April due to continued rate pressure. Subsequently, following the explosion rates increased, and Energy volume for the period was essentially flat.  Offshore Energy rates continued to rise during 1 July 2010 renewals, with weighed rate increases averaging 15 per cent. 

Changes in regulatory requirements relating to insurance for offshore rigs and platforms are expected in the aftermath of the Deepwater Horizon loss, which will likely lead to an increase in the amount of coverage purchased by policyholders.  Energy rates are expected to increase for the foreseeable future, and as a leading Energy insurer, Catlin is well-positioned to benefit from improvements in pricing, terms and conditions.

Property gross premiums written increased 32 per cent, attributable to the decision to write greater levels of property business in the first half of 2010, compared with the previous year, in anticipation that rates would decrease as the year progressed.  The product group generated a significant underwriting contribution of US$51 million despite losses related to the Chilean earthquake (30 June 2009: US$34 million).

The Reinsurance Product Group also turned in a good performance despite losses related to the Chilean earthquake.  Gross premiums written in the first half increased 14 per cent as the Group again chose to write a larger percentage of annual volume during the first half to take advantage of more favourable market conditions early in the year.  The Casualty Treaty portfolio produced a strong contribution despite the competitive marketplace.

Gross premiums written for Specialty/War & Political Risk business increased 16 per cent.  The increased volume reflects improved pricing and conditions following the credit and political risk losses sustained during the financial crisis, whilst the low loss ratio reflects these improvements and a benign loss environment during the first half of 2010.  The Group continues to underwrite credit and political risk selectively.

Underwriting outlook

Market conditions at 1 July 2010 renewals continued to be challenging across most classes of business, but weighted average premiums were flat during the period, reflecting  the Group's selective underwriting.  The Group also utilises portfolio flexibility to alter volumes to take advantage of rate environments where they appeared to be the most favourable. 

Despite the losses arising from the Chilean earthquake, rate increases for Property Catastrophe reinsurance at 1 July 2010 were limited to Chilean business.  The impact of the Deepwater Horizon loss has been wider-reaching, and Energy rates are expected to continue to rise.  However, it is still difficult to predict the timing of a wide-scale market correction absent an extreme event.

Investment Review

The total investment return for the period ended 30 June 2010 amounted to 1.8 per cent (30 June 2009: 2.9 per cent).   Cash and investments amounted to US$7.5 billion (31 December 2009: US$7.7 billion; 30 June 2009: US$7.1 billion). 

The Group maintained its defensive and liquid portfolio position during the first six months of 2010.  Cash and short-term instruments amounted to 43 per cent of total investment assets at 30 June 2010 (31 December 2009: 43 per cent; 30 June 2009: 42 percent).  Liquid assets - defined as cash, government securities and fixed income securities with less than six months to maturity - increased to 65 per cent of investment assets (31 December 2009: 62 per cent; 30 June 2009: 59 per cent).

A breakdown of total investment income appears in the table below:

US$m	30 June 2010	30 June 2009
Interest income	71	102
Net gains on fixed income investments	67	24
Gains on funds	6	72
Net costs of overlay options/futures	(4)	--
Total investment return	140	198

The Group's investment performance during the first half of 2010 by major asset category is analysed below:

	Average	Average
	allocation	allocation
	during period	during period	Return	Return
30 June 2010	US$m	%	US$m	%
Fixed income	3,943	52.0%	128	3.3%
Cash and short-term investments	3,320	43.8%	10	0.3%
Global bond/hedge funds - run off	261	3.5%	(3)	(1.1)
Hedge funds - strategic	54	0.7%	5	9.2%
	7,578	100.0%	140	1.8%

The Group's asset allocation at 30 June 2010 was as follows:

	30 June 2010	31 Dec 2009
Fixed income investments	54%	50%
Cash and short-term investments	43%	43%
Global bond/hedge funds - run off	2%	7%
Hedge funds - strategic	1%	--
	100%	100%

The increase in fixed income investments at 30 June 2010 reflects selective additions to agency mortgage-backed securities and the corporate bond portfolios.

The Group continued its ongoing redemption of non-strategic hedge fund investments; hedge funds in run-off amounted to US$164 million at 30 June 2010. However, during the period, the Group retained a small portfolio of strategically positioned hedge funds that target distressed securities; this portfolio produced a 9.2 per cent return.

Fixed income portfolio

Ninety-eight per cent of Catlin's fixed income is held in government/agency securities or instruments rated 'A' or higher (30 June 2009: 96 per cent).  The quality of the Group's fixed income investments is analysed in the table below.

	Government/				BBB or	Assets
30 June 2010	agency	AAA	AA	A	lower	US$m
US government/agency	19%	--	--	--	--	776
Non-US government/ agency	20%	--	--	--	--	808
Agency mortgage-backed securities	15%	--	--	--	--	590
FDIC-backed corporate bonds	9%	--	--	--	--	370
Asset-backed securities	--	6%	*	*	*	264
Non-agency mortgage-backed securities	--	*	--	--	1%	48
Commercial mortgage-backed securities	--	3%	*	*	*	175
Corporate bonds	--	1%	10%	15%	1%	1,022
Total	63%	10%	10%	15%	2%	4,053

* Less than 0.5 per cent

The duration of the fixed income portfolio was 2.2 years at 30 June 2010; the duration of the entire portfolio was 1.2 years.  The fixed income portfolio's running yield was 1.7 per cent at 30 June 2010.

The portfolio had no direct sovereign exposure to the governments of Portugal, Italy, Ireland, Greece and Spain at 30 June 2010.

Investment outlook

The investment outlook for the second half of 2010 remains uncertain, and Catlin has positioned the portfolio to optimise performance in a variety of economic scenarios. Catlin has the opportunity to deploy the portfolio's liquidity to produce additional yield should interest rates rise.  In addition, the limited downside credit exposure in the portfolio allows the Group to increase risk opportunistically within prescribed limits. In addition, the Group has implemented an option at low cost to extend asset duration by one year, which would produce gains from lower yields in the event of a double-dip recession scenario.

The Group is also in the process of implementing a revised, long-term investment strategy to improve the portfolio's risk/reward profile. Under this strategy the core portfolio is structured to minimise risk, whilst tactical investments can be made outside the core portfolio to earn liquidity and risk premiums.  Catlin will focus on fixed income sectors and other areas where Catlin can leverage its in-house investment expertise with a select group of strategic investment partners.  Finally, the Group will use overlays to manage portfolio risks more efficiently.

Aggregate Management

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

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

Modelled gross and net losses

The tables below show both the Data Model output and the Adjusted Data Model output. The Data Model output reflects the Group's interpretation of how external models and methods should be applied and are used internally for market consistent comparisons and for regulatory returns. However, uncertainties exist in the modelling based on the Data Model Output.  Due to these uncertainties and the range of potential outcomes, Catlin adds a further prudential margin to the modelled output to reflect the degree of uncertainty in any peril or scenario. This Adjusted Data Model output is used to monitor against the Group's risk appetite, as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and is a key consideration in the assessment of required capital.

Limitations

The modelled outcomes in the tables 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.

Examples of catastrophe threat scenarios/Data model output Outcomes derived as at 1 April 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)

	Florida		Gulf of
	(Miami)	California	Mexico	European	Japanese
US$m	Windstorm	Earthquake	Windstorm	Windstorm	Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000
Catlin Group
Gross loss	910	974	1,146	439	436
Reinsurance effect1	(637)	(685)	(694)	(113)	(112)
Modelled net loss	273	289	452	326	324
Modelled net loss as a percentage of capital available for underwriting2	10.3%	10.9%	17.0%	12.3%	12.2%

1	Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative. Reinsurance effect also takes into consideration recoveries and erosion of aggregate retentions relating to the February 2010 Chilean earthquake.
2	Capital available for underwriting amounted to US$2.7 billion at 31 December 2009; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax.

Examples of catastrophe threat scenarios/Adjusted data model output Outcomes derived as at 1 April 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)

	Florida		Gulf of
	(Miami)	California	Mexico	European	Japanese
US$m	Windstorm	Earthquake	Windstorm	Windstorm	Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000
Catlin Group
Gross loss	1,066	1,111	1,322	516	533
Reinsurance effect1	(654)	(700)	(715)	(190)	(209)
Modelled net loss	412	411	607	326	324
Modelled net loss as a percentage of capital available for underwriting2	15.5%	15.5%	22.9%	12.3%	12.2%

1	Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative. Reinsurance effect also takes into consideration recoveries and erosion of aggregate retentions relating to the February 2010 Chilean earthquake.
2	Capital available for underwriting amounted to US$2.7 billion at 31 December 2009; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax.

Board of Directors

Michael Harper, who had been the Group's Senior Independent Director since July 2005, resigned from the Board of Directors effective 1 July due to the demands of his other commitments.

Bruce Carnegie-Brown was appointed as a Non-Executive Director and Senior Independent Director with effect from 1 August 2010.  He was formerly Managing Partner and founder of 3i Group plc's quoted private equity division and was a member of 3i's Group Management Committee.  He also previously served as Chief Executive Officer of Marsh Limited's European and Middle Eastern operations and, prior to joining Marsh, spent 18 years at JP Morgan in a variety of roles including Senior Credit Officer for Europe, Middle East and Africa; Chairman of JP Morgan Securities Asia based in Tokyo; and Head of Debt Capital Markets in Europe and Asia.

I wish to take the opportunity to thank Michael Harper for his service to the Group over the past five years and to welcome Bruce Carnegie-Brown to the Board.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group are described on pages 69 to 71 of the 2009 Annual Report and Accounts. The principal risks faced by the Group, as stated in the  Annual Report, include:

·	Insurance risk
	-  Underwriting risk including the potential for extreme events major natural catastrophes as well as other unexpected losses
	-  Reserving risk
·	Other risk categories -  Financial market risk, including liquidity risk, currency risk and credit risk
	-  Operational risk

These are still considered to be the most relevant risks and uncertainties at the date of this report, and further disclosure in this report is not considered necessary.  Any of these risks and uncertainties could have an impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ from expected and historic results.

Going Concern

The Board is satisfied that the Company has adequate resources to continue in operation for the foreseeable future. The Company's financial statements therefore continue to be prepared on a going concern basis.

Catlin Arctic Survey

For the second consecutive year, Catlin is the sponsor of the Catlin Arctic Survey, an international collaboration between polar explorers and leading scientific research institutions.

The focus of the 2010 Catlin Arctic Survey, which commenced in March, was the impact of increased carbon emissions on the Arctic Ocean.  Scientists from UK, French and Canadian institutions worked from a purpose-built 'Ice Base' located on the Arctic floating sea ice to study the level of carbon absorption in the Arctic Ocean and the potential impact on species living in this frigid water.  The species are key to the global food chain.

Separately, a team of Arctic explorers trekked for 10 weeks across the Arctic sea ice, continuing the measurements begun in the 2009 Catlin Arctic Survey and collecting additional sea water samples.  This trek concluded in mid-May when the three explorers reached the North Geographic Pole.

The information collected by both phases of the 2010 Survey is currently being analysed by researchers, and scientific findings will be released in 2011.  However, the work carried out at the Ice Base and the explorers' trek again received substantial media coverage.

Conclusion

I am pleased with the progress made by the Group during the first six months of 2010.  Catlin's non-London hubs continued to produce strong, profitable growth.  Positive underwriting contributions were reported across the business, despite record first-half catastrophe losses.  We demonstrated our underwriting discipline through a reduction in the attritional loss ratio.  We further diversified our underwriting portfolio, and this diversification will continue with the establishment of Catlin Re Switzerland later this year.  We have positioned our investment portfolio to be resilient in a variety of economic scenarios.

We look ahead with confidence.

Stephen Catlin

Chief Executive

Catlin Group Limited

Consolidated Balance Sheets

As at 30 June 2010 and 2009 and 31 December 2009

(US dollars in millions)

	30 June	31 December	30 June
	2010	2009	2009
	(unaudited)	(audited)	(unaudited)
Assets
Investments
Fixed maturities, at fair value	$4,053	$3,867	$3,360
Short-term investments, at fair value	804	796	699
Investment in funds, at fair value	221	530	761
Total investments	5,078	5,193	4,820
Cash and cash equivalents	2,458	2,500	2,233
Securities lending collateral	15	15	15
Accrued investment income	32	32	34
Premiums and other receivables	1,525	1,133	1,438
Reinsurance recoverable	1,175	1,441	1,529
Reinsurers' share of unearned premiums	463	213	417
Deferred policy acquisition costs	421	292	364
Intangible assets and goodwill	715	718	732
Catastrophe swaps, at fair value	7	1	10
Unsettled trades receivable	-	-	218
Other assets	174	144	175
Total assets	$12,063	$11,682	$11,985
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses	$5,396	$5,392	$5,462
Unearned premiums	2,251	1,724	2,154
Reinsurance payable	550	653	690
Accounts payable and other liabilities	313	289	212
Subordinated debt	92	97	97
Unsettled trades payable	-	-	144
Foreign exchange derivatives, at fair value	12	-	-
Securities lending payable	15	15	15
Deferred tax liability (net)	240	234	205
Total liabilities	$8,869	$8,404	$8,979

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

	30 June	31 December	30 June
	2010	2009	2009
	(unaudited)	(audited)	(unaudited)
Stockholders' equity:
Common stock	$4	$4	$4
Preferred stock	590	590	590
Additional paid-in capital	1,937	1,938	1,919
Treasury stock	(101)	(62)	(59)
Accumulated other comprehensive loss	(195)	(189)	(182)
Retained earnings	959	997	734
Total stockholders' equity	3,194	3,278	3,006
Total liabilities and stockholders' equity	$12,063	$11,682	$11,985

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

Approved by the Board of Directors on 5 August 2010

Stephen Catlin

Director

Benjamin Meuli

Director

Catlin Group Limited

Consolidated Statements of Operations (Unaudited)

For the six months ended 30 June 2010 and 2009

(US dollars in millions, except per share amounts)

	2010	2009
Revenues
Gross premiums written	$2,461	$2,217
Reinsurance premiums ceded	(568)	(444)
Net premiums written	1,893	1,773
Change in net unearned premiums	(321)	(475)
Net premiums earned	1,572	1,298
Net investment return	137	195
Change in fair value of catastrophe swaps	(2)	(11)
Net gains/(losses) on foreign currency exchange	(49)	11
Other income	1	1
Total revenues	1,659	1,494
Expenses
Losses and loss expenses	1,020	783
Policy acquisition costs	325	269
Administrative and other expenses	219	194
Financing costs	9	8
Total expenses	1,573	1,254
Net income before income tax	86	240
Income tax expense	(7)	(22)
Net income	$79	$218
Preferred stock dividend	(22)	(22)
Net income to common stockholders	$57	$196
Earnings per common share
Basic	$0.17	$0.62
Diluted	$0.16	$0.60

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

Catlin Group Limited

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the six months ended 30 June 2010 and 2009

(US dollars in millions)

					Accumulated
			Additional		other		Total
	Common	Preferred	paid-in	Treasury	comprehensive	Retained	stockholders'
	stock	stock	capital	stock	(loss)/ income	earnings	equity
Balance 1 January 2009	$3	$590	$1,624	$(55)	$(301)	$608	$2,469
Comprehensive income:
Net income to common stockholders	-	-	-	-	-	196	196
Other comprehensive income	-	-	-	-	119		119
Total comprehensive income	-	-	-	-	119	196	315
Rights Issue	1	-	288	-	-	-	289
Stock compensation expense	-	-	5	-	-	-	5
Stock options and warrants exercised	-	-	-	-	-	-	-
Dividends	-	-	-	-	-	(67)	(67)
Deferred compensation obligation	-	-	3	-	-	(3)	-
Treasury stock purchased	-	-	-	(5)	-	-	(5)
Distribution of treasury stock                     held by Employee Benefit Trust	-	-	(1)	1	-	-	-
Balance 30 June 2009	$4	$590	$1,919	$(59)	$(182)	$734	$3,006
Balance 1 January 2010	$4	$590	$1,938	$(62)	$(189)	$997	$3,278
Comprehensive income:
Net income to common stockholders	-	-	-	-	-	57	57
Other comprehensive income	-	-	-	-	(6)	-	(6)
Total comprehensive income	-	-	-	-	(6)	57	51
Stock compensation expense	-	-	7	-	-	-	7
Stock options and warrants exercised	-	-	-	-	-	-	-
Dividends	-	-	-	-	-	(90)	(90)
Deferred compensation obligation	-	-	5	-	-	(5)	-
Treasury stock purchased	-	-	-	(52)	-	-	(52)
Distribution of treasury stock held in Employee Benefit Trust	-	-	(13)	13	-	-	-
Balance 30 June 2010	$4	$590	$1,937	$(101)	$(195)	$959	$3,194

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

Catlin Group Limited

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended 30 June 2010 and 2009

(US dollars in millions)

	2010	2009
Cash flows provided by operating activities
Net income	$79	$218
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	8	8
Amortisation of premiums of fixed maturities	13	2
Net gains on investments	(69)	(106)
Cessation of Syndicate 2020	-	112
Changes in operating assets and liabilities
Reserves for losses and loss expenses	140	102
Unearned premiums	570	568
Premiums and other receivables	(427)	(320)
Deferred policy acquisition costs	(137)	(108)
Reinsurance payable	(86)	193
Reinsurance recoverable	211	(46)
Reinsurers' share of unearned premiums	(262)	(97)
Accounts payable and other liabilities	28	(31)
Deferred taxes	(9)	13
Other	42	(74)
Net cash flows provided by operating activities	101	434
Cash flows used in investing activities
Purchases of fixed maturities	(1,249)	(1,056)
Proceeds from sales of fixed maturities	941	660
Proceeds from maturities of fixed maturities	122	52
Net purchases, sales and maturities of short-term investments	(21)	(630)
Purchases of investments in funds	(4)	-
Redemptions of investment in funds	312	135
Net purchases and sales of property and equipment	(4)	(7)
Change in securities lending collateral	-	18
Net cash flows provided by/(used in) investing activities	$97	$(828)

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

	2010	2009
Cash flows provided by financing activities
Net proceeds from Rights Issue	-	289
Dividends paid on common stock	(90)	(67)
Dividends paid on preferred stock	(22)	(22)
Change in securities lending collateral payable	-	(17)
Purchase of treasury stock	(52)	(5)
Net cash flows (used in)/provided by financing activities	(164)	178
Net increase/(decrease) in cash and cash equivalents	34	(216)
Effect of exchange rate changes in the period	(76)	94
Cash and cash equivalents - beginning of period	2,500	2,355
Cash and cash equivalents - end of period	$2,458	$2,233
Supplemental cash flow information
Taxes received	$25	$20
Interest paid	$5	$3
Cash and cash equivalents comprise the following:
Cash at bank and in hand	$1,970	$1,981
Cash equivalents	$488	$252

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

Catlin Group Limited

Notes to the Consolidated Financial Statements (Unaudited)

For the six months ended 30 June 2010 and 2009

1  General

Basis of presentation

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 unaudited interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America ('US GAAP'), as set out in the consolidated financial statements for the year ended 31 December 2009.

Currency of intangible assets

Of the total amount of intangible assets and goodwill at 31 December 2009 of $718 million, $634 million (88%) related to syndicate capacity and was measured in UK sterling. With effect from 1 January 2010, the syndicate capacity and related tax liability of $95 million have been measured in US dollars and therefore there will be no foreign currency revaluation of the net balance going forward. This reflects that the majority of business written in the Syndicate is written in US dollars. Consequently the value of syndicate capacity has been fixed at $634 million at the date of transfer.

Accounting policies

The accounting policies applied are consistent with those described in the consolidated financial statements for the year ended 31 December 2009.

2  Segmental information

In line with the management's continued focus on underwriting hubs, Catlin has modified its segmental reporting to reflect more closely the manner in which results are reviewed by management.  In 2009, Catlin had four reportable segments, corresponding to the Group's risk-bearing legal entities: Catlin Syndicate, Catlin Bermuda, Catlin UK and Catlin US.

From 2010, Catlin has four reportable segments aligned to underwriting hubs, which correspond to where the business is written:

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

·      Bermuda, which primarily underwrites reinsurance business;

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

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

The comparatives have been restated accordingly.

The table below illustrates which legal entities bear the risks originating in each underwriting hub.  Some hubs underwrite on behalf of more than one legal entity.

	Risk-bearing entities
	Catlin Syndicate	Catlin Bermuda	Catlin UK	Catlin US
London/UK	●		●
Bermuda		●
US	●		●	●
International	●		●

Net underwriting contribution by underwriting hub for the period ended 30 June 2010 is as follows:

(US dollars in millions)	London/UK	Bermuda	US	International	Total
Gross premiums written	$1,409	$419	$346	$287	$2,461
Net premiums earned	906	216	272	178	1,572
Losses and loss expenses	(624)	(119)	(183)	(94)	(1,020)
Policy acquisition costs	(198)	(43)	(49)	(35)	(325)
Net underwriting contribution	$84	$54	$40	$49	$227

Net underwriting contribution by underwriting hub for the period ended 30 June 2009 is as follows:

(US dollars in millions)	London/UK	Bermuda	US	International	Total
Gross premiums written	$1,431	$332	$267	$187	$2,217
Net premiums earned	824	162	182	130	1,298
Losses and loss  expenses	(493)	(84)	(84)	(122)	(783)
Policy acquisition costs	(186)	(35)	(30)	(18)	(269)
Net underwriting contribution	$145	$43	$68	$(10)	$246

The effects of intra-Group reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

Premiums are the only items of revenue reported in the Group's Consolidated Statement of Operations that are managed on a segmental basis.

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

3  Investments

Fixed maturities

The fair values of fixed maturities at 30 June 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
US government and agencies	$776	$731
Non-US governments	808	601
Corporate securities	1,392	1,054
Asset-backed securities	264	280
Mortgage-backed securities	813	694
Total fixed maturities	$4,053	$3,360

Fixed maturities at 30 June 2010, 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)	2010
Due in one year or less	$369
Due after one through five years	2,307
Due after five years through ten years	261
Due after ten years	39
	2,976
Asset-backed securities	264
Mortgage-backed securities	813
Total	$4,053

The Group did not have an aggregate investment with a single counterparty, other than the US government, in excess of 10 per cent of total investments at 30 June 2010 and 2009.

Investment in funds

Investments in funds by category at 30 June 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Internal fund of funds	$168	$442
Funds of funds	6	246
Equity funds	-	31
Bond fund	47	42
Total investments in funds	$221	$761

The internal fund of funds is an internally managed fund which comprises 13 individual hedge funds.

Hedge funds within the internal fund of funds are subject to redemption terms which vary from 30 days' notice and monthly redemptions to 65 days' notice and 25 per cent of funds being redeemable each quarter. The Group has submitted redemption requests for all hedge funds, apart from four, two of which are continuing to be held and two for which the Group will submit redemption requests on 1 December 2010.

Funds of funds comprise two funds invested across a diversified set of managers, strategies and underlying asset classes. These have been redeemed with the remaining $6 million received in July 2010.

At 30 June 2009 Catlin's investments in equity funds comprised two equity funds invested in a variety of equity securities with an objective to provide long-term return. Both funds were redeemed by the end of 2009.

The bond fund is a portfolio of government and corporate bonds with an objective to outperform the OECD bond benchmark over a two-year period. The bond fund is redeemable on a daily basis.

There are no unfunded commitments related to investment in funds as at 30 June 2010.

Net investment return

The components of net investment return for the periods ended 30 June 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Interest income	$71	$102
Net gains on fixed maturities and short term investments	67	24
Net gains on investments in funds	2	72
Total investment return	140	198
Investment expenses	(3)	(3)
Net investment return	$137	$195

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 ('LOC'), as described in Note 8.  Finally, the Group also utilises trust funds set up for the benefit of certain ceding companies generally as an alternative to LOCs.

The total values of these restricted assets by category at 30 June 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Fixed maturities	$1,879	$1,758
Short-term investments	45	57
Cash and cash equivalents	670	619
Total restricted assets	$2,594	$2,434

4  Fair value measurement

The 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 thatmaximises 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 and liabilities utilising Level 1 inputs comprise investments in equity funds.

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

Assets and liabilities utilising Level 2 inputs include: US government and agency securities; non-US government obligations, corporate and municipal bonds, 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 currency options and forward contracts); fixed-term cash deposits classified as short-term investments 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 and liabilities utilising Level 3 inputs include: insurance and reinsurance derivative contracts ('cat swaps'); investments in funds with significant redemption restrictions; collateralised debt obligations ('CDO'); sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs reflect individual assumptions and judgments regarding ultimate delinquency and foreclosure rates and estimates regarding the likelihood and timing of events of defaults.

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

.

Assets and liabilities measured at fair value on a recurring basis

The table below shows the values at 30 June 2010 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

	Balance at	Level 1	Level 2	Level 3
(US dollars in millions)	30 June 2010	inputs	inputs	inputs
Assets
US government and agencies	$776	$-	$776	$-
Non-US governments	808	-	808	-
Corporate securities	1,392	-	1,392	-
RMBS	638	-	604	34
CMBS	175	-	175	-
ABS	260	-	258	2
CDO	4	-	-	4
Total fixed maturities	4,053	-	4,013	40
Short-term investments	804	-	804	-
Investments in funds	221	-	53	168
Catastrophe swaps	7	-	-	7
Total assets at fair value	$5,085	$-	$4,870	$215
Liabilities
Foreign exchange derivative contracts	$(12)	$-	$(12)	$-

There have been no significant transfers in or out between Level 1 and Level 2 of the fair value hierarchy.

The table below shows the values at 30 June 2009 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

	Balance at	Level 1	Level 2	Level 3
(US dollars in millions)	30 June 2009	inputs	inputs	inputs
Assets
US government and agencies	$731	$-	$731	$-
Non-US governments	601	-	601	-
Corporate securities	1,054	-	1,054	-
RMBS	454	-	420	34
CMBS	240	-	240	-
ABS	280	-	274	6
CDO	-	-	-	-
Total fixed maturities	3,360	-	3,320	40
Short-term investments	699	-	699	-
Investments in funds	761	31	474	256
Catastrophe swaps	10	-	-	10
Total assets at fair value	$4,830	$31	$4,493	$306

The changes in the period in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

					Investments	Catastrophe
(US dollars in millions)	Total	RMBS	ABS	CDO	in funds	swaps
Balance, 1 January 2010	$432	$66	$4	$4	$357	$1
Total net gains included in income	17	4	1	-	6	6
Net disposals	(241)	(47)	(2)	-	(192)	-
Level 3 transfers in	11	11	-	-	-	-
Level 3 transfers out	(1)	-	(1)	-	-	-
Foreign exchange	(3)	-	-	-	(3)	-
Balance, 30 June 2010	$215	$34	$2	$4	$168	$7
Amount of gains/ relating to balances still held at period end	$10	$-	$-	$1	$3	$6

Level 3 transfers in from Level 2 for RMBS were due to securities rated at CCC or below, where previously they were rated B or higher. Level 3 transfers out of ABS and into RMBS were due to a change in classification of assets.

The changes in the period ended 30 June 2009 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

					Investments	Catastrophe
(US dollars in millions)	Total	RMBS	ABS	CDO	in funds	swaps
Balance, 1 January 2009	$379	$31	$3	$4	$334	$7
Total net gains/(losses) included in income	61	(1)	1	(4)	62	3
Net disposals	(33)	-	(3)	-	(30)	-
Level 3 transfers (out)/in	(101)	4	5	-	(110)	-
Balance, 30 June 2009	$306	$34	$6	$-	$256	$10
Amount of gains/(losses) relating to balances still held at period end	$47	($1)	($1)	$-	$46	$3

Level 3 transfers in from Level 2 for RMBS, ABS and CDO occurred because of lack of observable market data due to a decrease in market activity for these securities.

Fair value of financial instruments

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

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 fair value of investments in funds is based on either the net asset value provided by the funds' administrators, or where available, the quoted price of the funds. 

Derivatives: The fair values of the catastrophe swap agreements are determined using internal models based on the valuation of the underlying notes issued by the counterparty.  The determination of the fair values takes into account changes in the market for catastrophic reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date. The fair values of foreign exchange contracts are based on prices provided by independent pricing services.

Subordinated debt: Subordinated debt is not carried at fair value but at historical cost.  At 30 June 2010, the fair value of the subordinated debt was $64 million which compared to a carrying value of $92 million.  The fair value of the subordinated debt is estimated by comparing Catlin Bermuda's preferred stock and other peer group instruments to determine market required yields. Market required yields were used to estimate market value. 

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

5  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 it has made a reasonable estimate of the level of reserves at 30 June 2010 and 2009.

The reconciliation of unpaid losses and loss expenses for the six months ended 30 June 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Gross unpaid losses and loss expenses, beginning of year	$5,392	$4,606
Reinsurance recoverable on unpaid loss and loss expenses	(1,172)	(1,070)
Net unpaid losses and loss expenses, beginning of year	4,220	3,536
Net incurred losses and loss expenses for claims related to:
Current period	1,049	822
Prior periods	(29)	(39)
Total net incurred losses and loss expenses	1,020	783
Net paid losses and loss expenses for claims related to:
Current period	(203)	(49)
Prior periods	(550)	(492)
Total net paid losses and loss expenses	(753)	(541)
Foreign exchange and other	(83)	(50)
Loss portfolio transfer	-	431
Net unpaid losses and loss expenses, end of period	4,404	4,159
Reinsurance recoverable on unpaid loss and loss expenses	992	1,303
Gross unpaid losses and loss expenses, end of period	$5,396	$5,462

As a result of the changes in estimates of insured events in prior periods, the 2010 reserve for losses and loss expenses net of reinsurance recoveries decreased by $29 million (2009: decrease of $39 million).  The decrease in reserves relating to prior years is due to reductions in expected ultimate loss costs and reductions in uncertainty surrounding the quantification of the net cost of claim events.

Loss portfolio transfer

As part of the purchase of Wellington Underwriting plc in 2006, the Group acquired approximately two-thirds of the capacity on Lloyd's Syndicate 2020.  In a simultaneous but separate transaction, Catlin effectively acquired the remaining capacity from unaligned members by way of a cessation agreement. In 2009, Syndicate 2020 closed its 2006 Lloyd's underwriting year of account by way of a Lloyd's reinsurance to close ('RITC'). RITC is a contract between the Lloyd's members on one syndicate underwriting year of account and the members on another syndicate underwriting year of account, whereby the members on the earlier year reinsure all their outstanding liabilities with the members on the later year. 

As a result of the transaction, the Catlin Syndicate assumed the 33 per cent of Syndicate 2020's outstanding losses previously attributable to the syndicate's third-party members, in addition to the 67 per cent share already held by the Group.

The remaining net liability in Syndicate 2020, calculated as $431 million, was assumed by Syndicate 2003 through a payment in the form of cash and investments in the same amount. The transaction has been treated as a loss portfolio transfer, recorded as an increase in net loss reserves with no impact on the Consolidated Statements of Operations. 

6  Reinsurance

The Group purchases reinsurance to limit various exposures including catastrophe risks.  Although reinsurance agreements contractually obligate the Group's reinsurers to reimburse it for the agreed upon portion of its gross paid losses, they do not discharge the primary liability of the Group.  The effect of reinsurance and retrocessional activity on premiums written and earned is as follows:

	2010		2009
	Premiums	Premiums	Premiums	Premiums
(US dollars in millions)	written	earned	written	earned
Direct	$1,451	$1,301	$1,379	$1,140
Assumed	1,010	586	838	504
Ceded	(568)	(315)	(444)	(346)
Net premiums	$1,893	$1,572	$1,773	$1,298

The Group's provision for reinsurance recoverable as at 30 June 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Gross reinsurance recoverable	$1,220	$1,582
Provision for uncollectible balances	(45)	(53)
Net reinsurance recoverable	$1,175	$1,529

7  Derivative financial instruments

Catastrophe swap agreements

Newton Re

On 17 December 2007, Catlin Bermuda entered into a contract that provides up to $225 million in coverage in the event of one or more natural catastrophes. Catlin Bermuda's counterparty in the catastrophe swap ('cat swap') is a special purpose vehicle, Newton Re. Newton Re has issued to investors $225 million in three-year floating rate notes, divided into Class A and Class B notes. The proceeds of those notes provide the collateral for Newton Re's potential obligations to Catlin Bermuda under the cat swap.

The Newton Re cat swap responds to certain covered risk events occurring during a three-year period. The categories of risk events covered by the transaction are US hurricanes and US earthquakes. Newton Re will pay a maximum of $138 million for US hurricane events and $88 million for US earthquake events.

The Newton Re cat swap will be triggered for risk events if aggregate insurance industry losses, as estimated by Property Claims Services ('PCS'), meet or exceed defined threshold amounts.

The cat swap has not been triggered as at 30 June 2010.

Bay Haven

On 17 November 2006, Catlin Bermuda entered into two cat swaps that provided up to $257 million in coverage in the event of a series of natural catastrophes. Catlin Bermuda's counterparty in the cat swaps was a special purpose vehicle, Bay Haven Limited. The Bay Haven cat swaps were designed to respond to certain covered risk events occurring during a three-year period. The cat swaps expired in November 2009 without being triggered.

Valuation of Catastrophe Swap Agreements

The cat swaps are measured in the balance sheet at fair value with any changes in the fair value included in the Consolidated Statements of Operations. As at 30 June 2010, the fair value of the cat swaps is an asset of $7 million (2009: $10 million). As there is no liquid market in this derivative, the fair value is derived from indicative prices for the notes issued by the cat swap counterparties.

Options contracts

The Group is exposed to certain risks relating to its ongoing business operations. A primary risk managed by using derivative instruments is market risk. A portion of the investment portfolio is invested in hedge funds and fund of funds. During 2009 equity market put option contracts were entered into to manage the market risk associated with holding these investments in funds. No equity market put options contracts were held at 30 June 2010 and 2009.

Gains and losses for equity market options contracts are included in net investment return in the Consolidated Statements of Operations.

Foreign exchange contracts

During the period, the Group held foreign currency derivatives to manage currency risk.  Gains and losses on foreign exchange contracts are included in net gains on foreign currency exchange in the Consolidated Statements of Operations.  At 30 June 2010 the Group held forward contracts in the Consolidated Balance Sheet with the notional value of $148 million. No contracts were held at 30 June 2009.

Impact of derivatives

The fair values of derivatives at 30 June 2010 and 2009 are as follows:

		2010		2009
(US dollars in millions)	Assets	Liabilities	Assets	Liabilities
Foreign exchange contracts	$-	$(12)	$-	$-
Catastrophe swaps	7	-	10	-
Total derivatives	$7	$(12)	$10	$-

The gains and losses on derivatives for the period ended at 30 June 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Equity market options contracts	$(4)	$-
Foreign exchange contracts	(20)	4
Catastrophe swaps	(2)	(11)
Net losses on derivatives	$(26)	$(7)

The derivatives contracts held by the Group at 30 June 2010 and 2009 contained no credit-risk related contingent features.

8  Subordinated debt and financing arrangements

The Group's outstanding subordinated debt as at 30 June 2010 and 2009 consisted of the following:

(US dollars in millions)	2010	2009
Variable rate, face amount €7, due 15 March 2035	$9	$10
Variable rate, face amount $27, due 15 March 2036	27	28
Variable rate, face amount $31, due 15 September 2036	32	33
Variable rate, face amount $10, due 15 September 2036	10	10
Variable rate, face amount €11, due 15 September 2036	14	16
Total subordinated debt	$92	$97

Subordinated debt

On 12 May 2006 Catlin Underwriting (formerly '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 US dollar notes and 295 basis points for the euro notes.  Interest is payable quarterly in arrears.  The notes are redeemable at the discretion of the issuer beginning on 15 March 2011 with respect to the US 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 are each redeemable at the discretion of the issuer beginning on 15 September 2011.

Bank facilities

The Group participates in a Letter of Credit/Revolving Loan Facility (the 'Club Facility'), which includes seven banks. The Club Facility was most recently amended on 10 September 2008, when the credit available under the Club Facility was set at $600 million and £320 million. The amended Club Facility was composed of three tranches, the first of which, a 364-day, $100 million revolving facility ('Facility A') expired undrawn on 10 September 2009. The following amounts were outstanding under the Club Facility as at 30 June 2010:

·      Clean, irrevocable standby LOCs of $477 million (£320 million) are available to support the Catlin Syndicate's underwriting at Lloyd's ('Facility B'). As at 30 June 2010 the Catlin Corporate Members and Catlin Syndicate have utilised Facility B and deposited with Lloyd's 13 LOCs which total the amount of $477 million (£320 million). In the event that the Catlin Syndicate fails to meet its obligations under policies of insurance written on its behalf, Lloyd's could draw down these letters of credit. These LOCs have an initial expiry date of 27 November 2013.

·      A two-year $500 million standby LOC facility is available for utilisation by Catlin Bermuda and Catlin UK ('Facility C'). It is further split into two equal tranches of $250 million with the first being fully secured by OECD Government Bonds, US Agencies, Corporate and Asset Backed securities and or cash discounted at varying rates. The second tranche is unsecured. As at 30 June 2010 $175 million in LOCs were outstanding, of which $171 million were issued for the benefit of insureds and re-insureds of Catlin Bermuda, and $4 million (£3 million) issued for the benefit of an insured of Catlin UK. $54 million of the LOCs were issued on an unsecured basis. Facility C has an expiry date of 31 December 2010.

The terms of the Club Facility require that certain financial covenants be met on a quarterly basis as evidenced by the filing of Compliance Certificates. These include maximum levels of possible exposures to realistic disaster scenarios for the Group, as well as requirements to maintain minimum tangible net worth. The Group was in compliance with all covenants during the six months to 30 June 2010.

A second LOC Facility administered by Citibank on behalf of Lloyd's acting for the Lloyd's Syndicates had LOCs totalling $5 million outstanding at 30 June 2010. 

Catlin US issued LOCs to state regulators and other parties. These LOCs amount to $6 million.

9  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 2016.

United Kingdom

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

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

United States

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

Other international income taxes

The Group has a network of international operations, and they 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 six months ended 30 June 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Current tax expense	$-	$-
Deferred tax expense	7	22
Income tax expense	$7	$22

The Group records income taxes for the period based on the estimated effective annual rates for the years ending 31 December 2010 and 2009.

Unrecognised tax benefits

As at 30 June 2010, the Group's unrecognised tax benefits were $13 million (2009: $4 million).  All unrecognised tax benefits would affect the effective tax rate if recognised. 

10  Stockholders' equity

The following is a detail of the number and par value of shares authorised, issued and outstanding as at 30 June 2010 and 2009:

	2010	2009
Common stock, par value $0.01
Authorised	500,000,000	500,000,000
Issued	358,993,715	358,388,745
Stock held by Employee Benefit Trust	(15,672,452)	(8,347,945)
Outstanding	343,321,263	350,040,800
Preferred stock, par value $0.01
Authorised, issued and outstanding	600,000	600,000

The following table outlines the changes in common stock issued during 2010 and 2009:

	2010	2009
Balance, 1 January	358,895,225	255,162,926
Exercise of stock options and warrants	98,490	1,157,769
Rights Issue	-	102,068,050
Balance, 30 June	358,993,715	358,388,745

Rights Issue

In March 2009, the Company issued 102,068,050 new common shares, par value of $0.01 per common share, by way of a Rights Issue at 205 pence per new common share on the basis of 2 new common shares for every 5 existing common shares. The proceeds of the Rights Issue, after issue costs, were $289 million.

Preferred stock

On 18 January 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, which were used to repay a $500 million bridge facility, a $50 million revolving loan issued under Facility A, and for general corporate purposes. The preferred shares do not have a maturity date and are not convertible into or exchangeable into any of Catlin Bermuda's or the Group's other securities.

Treasury stock

In connection with the Performance Share Plan ('PSP'), at each dividend date, an amount equal to the dividend that would be payable in respect of the stock to be issued under the PSP (assuming full vesting) is paid into an Employee Benefit Trust ('EBT'). The EBT uses these funds to purchase Group stock on the open market. This stock will ultimately be distributed to PSP holders to the extent that the PSP awards vest.  The group has also purchased shares through the EBT that will be used to satisfy PSP and/or other employee share plan awards if and when they vest and become exercisable. During 2010, the Group, through the EBT, purchased 9,441,000 of the Group's stock, at an average price of $5.41 (£3.56) per unit. The total amount paid of $52 million is shown as a deduction to stockholders' equity. The cumulative cost of shares purchased though EBT of $101 million is shown as a deduction of stockholders' equity.

Warrants

In 2002 the Company issued 20,064,516 warrants to purchase common stock. Warrants may be exercised in whole or in part, at any time, until 4 July 2012 and are exercised at a price per share of $4.37. During 2009 warrants increased by 869,456 in relation to the Rights Issue pursuant to anti-dilution provisions. No warrants were exercised in the period, leaving a remaining balance of 6,907,342 warrants outstanding at 30 June 2010.

Dividends

Dividends on common stock

On 10 February 2010 the Board declared a dividend of 16.8 pence per share (26.2 cents per share), paid on 26 March 2010 to stockholders of record at the close of business on 26 February 2010.  The final dividend is determined in US dollars but partially payable in sterling based on the exchange rate of £1=$1.56 on 10 February 2010. The total dividend paid for the 2009 financial year was 25 pence per share (40 cents per share).

Dividends on preferred stock

On 19 January 2010 Catlin Bermuda paid a dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

11  Employee stock compensation schemes

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

On 11 February 2010 a total of 6,449,181 options with $nil exercise price and 2,502,225 non-vested shares (total of 8,951,406 securities) were awarded to Group employees under the PSP.  Up to half of the securities will vest in 2013 and up to half will vest in 2014, subject to certain performance conditions. 

The total cost of the plans expensed in the six months ended 30 June 2010 was $7 million (2009: $5 million).

12  Earnings per share

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

Diluted earnings per share is calculated by dividing the earnings attributable to all stockholders by the weighted average number of common shares in issue adjusted to assume conversion of all dilutive potential common shares.

The Company has the following potentially dilutive instruments outstanding during the periods presented:

·      PSP;

·      LTIP;

·      Employee share plans; and

·      Warrants

Income to common stockholders is arrived after deducting preferred stock dividends of $22 million (2009: $22 million).

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

	2010	2009
Weighted average number of shares	345,845,084	317,286,542
Dilution effect of warrants	1,254,063	79,962
Dilution effect of stock options and non-vested stock	9,142,081	7,923,948
Weighted average number of shares on a diluted basis	356,241,228	325,290,452
Earnings per common share
Basic	$0.17	$0.62
Diluted	$0.16	$0.60

As described in Note 10, in 2009 the Company issued new common shares by way of a rights issue of 2 new common shares for every 5 existing common shares. The impact of the bonus element included within the Rights Issue has been reflected in the calculations of the basic and diluted earnings per share for the prior period.

13  Subsequent events

The Board of Catlin Bermuda approved a dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.  This dividend was paid on 19 July 2010. 

The Board of Directors, on 5 August 2010, declared an interim dividend of 8.6 pence per share (13.7 cents) payable on 24 September 2010 to shareholders of record on 27 August 2010.  The 2010 interim dividend represents a 5 per cent increase over the 2009 interim dividend of 8.2 pence per share (13.8 cents).

Management has evaluated subsequent events until 5 August 2010, the date of issuance of the financial statements. 

Independent Review Report to the Board of Directors and the Stockholders of Catlin Group Limited

Introduction

We have been engaged by Catlin Group Limited ('the Company') to review the condensed set of financial statements included in the Half-yearly Financial Report for the six months ended 30 June 2010, which comprises the  Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders' Equity, Consolidated Statements of Cash Flows and related notes. We have read the other information contained in the Half-Yearly Financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The Half-Yearly Financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-yearly Financial Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

The condensed set of financial statements included in this Half-Yearly Financial Report has been prepared in accordance with accounting principles generally accepted in the United States of America.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the Half-yearly Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half-yearly Financial Report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with accounting principles generally accepted in the United States of America and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers
Bermuda

5 August 2010

Statement of Responsibility

The Directors confirm that to the best of our knowledge: 

·      The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America;

·      The Half-yearly Report includes a fair review of the information required by the Disclosure and Transparency Rules ('DTR') 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

·      The interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein). 

By order of the Board. 

Stephen Catlin 

Chief Executive

Benjamin Meuli

Chief Financial Officer

5 August 2010

 

END

 

 

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