Final Results

RNS Number : 9836A

Catlin Group Limited

10 February 2011

CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2010

HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), the international specialty property/casualty insurer and reinsurer, announces its financial results for the year ended 31 December 2010.

Financial Highlights

· US$406 million in profit before tax (2009: US$603 million)

· 5 per cent increase in net underwriting contribution¹ to US$683 million (2009: US$651 million) despite increased catastrophe-related losses

· 16 per cent return on net tangible assets in US dollars (2009: 33 per cent)

· 16 per cent increase in net tangible assets per share in sterling to £4.24 per share (2009: £3.64)

· Non-London hubs produced 46 per cent of net underwriting contribution (2009: 39 per cent)

· 10 per cent increase in net premiums earned to US$3.2 billion (2009: US$2.9 billion)

· 52 per cent attritional loss ratio (2009: 54 per cent)

· 90 per cent combined ratio (2009: 89 per cent); 7.2 percentage points relate to catastrophe losses (2009: nil)

· US$144 million release from prior year loss reserves, equal to 3 per cent of opening reserves
(2009: US$94 million; 2 per cent of opening reserves)

· 2.7 per cent total investment return produced by liquid asset portfolio (2009: 5.9 per cent)

· 6 per cent increase in annual dividend to 26.5 pence (28.8 US cents) per share (2009: 25.0 pence; 40.0 US cents)

Operational Highlights

· All underwriting hubs produced meaningful net underwriting contributions

· Strict underwriting selectivity in the light of increased competition; average weighted premium rates decreased by 1 per cent across Group's underwriting portfolio (2009: 6 per cent increase)

· Global underwriting infrastructure and focus on disciplined underwriting positions Group for profitable growth in competitive market environment

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

US$m		2010	2009
Gross premiums written		$4,069	$3,715
Net premiums written		$3,318	$3,168
Net premiums earned		$3,219	$2,918
Net underwriting contribution¹		$683	$651
Total investment return		$212	$419
Net income before income taxes		$406	$603
Net income to common stockholders		$337	$509
Earnings per share (US dollars)		$0.98	$1.52
Total dividend per share (pence)		26.5p	25.0p
Total dividend per share (US cents)		28.8¢	40.0¢
Loss ratio²		57.5%	57.6%
Expense ratio²		32.3%	31.5%
Combined ratio²		89.8%	89.1%
Total investment return		2.7%	5.9%
Return on net tangible assets³		16.3%	33.2%
Return on equity³		12.5%	24.3%
	31 Dec 2010	31 Dec 2009	% change
Total assets	$12,082	$11,682	3%
Investments and cash	$8,021	$7,693	4%
Stockholders' equity	$3,448	$3,278	5%
Unearned premiums	$1,886	$1,724	9%
Net tangible assets per share (sterling)⁴	£4.24	£3.64	16%
Net tangible assets per share (US dollars)⁴	$6.53	$5.90	11%
Book value per share (sterling)⁴	£5.41	£4.74	14%
Book value per share (US dollars)⁴	$8.34	$7.68	9%

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

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

3 Returns on net tangible assets and equity exclude preferred shares and are calculated by reference to opening balances.

4 Book value and net tangible book value per share exclude preferred shares and treasury shares.

Sir Graham Hearne, Chairman of Catlin Group Limited, said:

"Catlin continued to produce good results for shareholders in 2010, with profit before tax amounting to US$406 million, equal to a 16.3 per cent return on net tangible assets.

"Shareholder value increased significantly during the year: net tangible assets per share in sterling rose by 16 per cent, whilst book value per share increased by 14 per cent. The total 2010 dividend of 26.5 pence per share is a 6 per cent increase over the prior year, reflecting our confidence in the Group's prospects. Since its initial public offering in 2004, Catlin has increased its annual dividend by 145 per cent and paid more than £400 million to shareholders."

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

"All of Catlin's underwriting hubs performed well during 2010, despite increasing market competition and a high incidence of natural catastrophes. The underwriting contribution from our non-London hubs continued to grow, producing 46 per cent of the Group's total underwriting profits in 2010. These hubs provide a diverse spread of business and are demonstrating their capacity to provide profitable growth to the Group.

"We managed our portfolio carefully during 2010. Premium rates decreased by only 1 per cent in a highly competitive market. Our attritional loss ratio was 51.6 per cent, more than 2 percentage points better than in 2009. Overall, the Group's loss ratio held steady during 2010 in spite of the significant increase in catastrophe-related losses during the year.

"Over the years, Catlin's goal has been to build a business for the future. Our focus on underwriting discipline and investment in our non-London underwriting hubs enabled us to produce strong results in 2010 despite the catastrophe losses and the low interest rate environment. Catlin is positioned to prosper in the current competitive environment and to take full advantage when conditions improve."

- ends -

For more information contact:

Media Relations:
James Burcke,	Tel:	+44 (0)20 7458 5710
Head of Communications, London	Mobile:	+44 (0)7958 767 738
	E-mail:	james.burcke@catlin.com

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

Notes to editors:

1. Catlin Group Limited, headquartered in Bermuda, is an international specialist property/
casualty insurer and reinsurer writing more than 30 classes of business worldwide through six underwriting hubs. Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). More information about Catlin can be found at www.catlin.com.

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

3. Catlin management will make a presentation to investment analysts at 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.

4. Rates of exchange at 31 December 2010 - balance sheet: £1= US$1.54 (2009: £1 = US$1.62); income statement (average rate): £1 = US$1.55 (2009: £1 = US$1.56).

5. Earnings per share are based on weighted average shares in issue of 344 millionduring 2010. Book value per share is based on 343 million shares in issue at 31 December 2010. Both calculations exclude Treasury Shares held in trust.

6. Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2010 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment performance commentary.

7. Catlin is the title sponsor of the Catlin Arctic Survey, an ongoing scientific project in the Arctic whose aim is to produce scientific data that scientists can use to predict the effects of climate change and other environmental changes. The 2011 Catlin Arctic Survey commences in March. More information regarding the Survey is available at www.catlinarcticsurvey.com.

Chairman's Statement

Catlin continued to produce good results for shareholders in 2010. Profit before tax amounted to US$406 million, whilst the return on net tangible assets was 16.3 per cent. I am pleased with these results, even though they fell short of 2009's record-setting performance.

Catlin's 2010 results were impacted by two factors. We predicted a year ago that total investment return would decrease significantly during 2010 due to the continued low interest rate environment. What we could not predict was that natural catastrophe losses would amount to more than $200 million, compared with no such losses in 2009.

Net underwriting contribution - the primary measure by which Catlin assesses underwriting performance - rose by 5 per cent despite the catastrophes and despite increased competition in the insurance and reinsurance markets. This excellent underwriting performance demonstrates Catlin's sound risk selection abilities as well as the advantages produced by our international diversification strategy.

Shareholder value

Shareholder value increased significantly during 2010, as measured by net tangible asset value per share (increased by 16 per cent in sterling terms and 11 per cent in US dollars). Likewise, book value per share in sterling increased by 14 per cent and in US dollars by 9 per cent.

The Board of Directors has declared a final dividend of 17.9 pence per share (28.8 US cents), payable on 18 March 2011 to shareholders of record at the close of business on 18 February 2011. Including the interim dividend of 8.6 pence per share (13.7 US cents), the total 2010 dividend of 26.5 pence per share (42.5 US cents) represents a 6 per cent increase when compared with the 2009 dividend.

The dividend paid by Catlin has increased for six consecutive years. Since the Group's initial public offering in April 2004, the dividend has increased by 145 per cent, and the total amount of dividends payable by now exceeds £400 million. This demonstrates the Board's continued confidence in the Group's prospects and reaffirms our commitment to providing an attractive return to our shareholders through the dividend.

Dividends paid since initial public offering (UK pence)

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

Board of Directors

Bruce Carnegie-Brown joined the Board as Senior Independent Director with effect from 1 August 2010. Bruce was formerly Managing Partner and founder of 3i Group plc's quoted private equity division. He also served as Chief Executive Officer of Marsh Limited's European and Middle Eastern operations and spent 18 years at JP Morgan in a variety of leadership roles. Bruce's diverse background in finance and insurance will enable him to make a valuable contribution to the Board's deliberations.

Michael Crall and Alan Bossin - who have served as Catlin Directors since October 2003 and March 2004, respectively - have chosen not to stand for re-election at the 2011 Annual General Meeting in May. I would like to pay tribute to Michael and Alan for their long service to the Catlin Board and its Committees and their contributions to the Group's development.

Conclusion and outlook

During the past year Catlin marked the 25^th anniversary of the Group's formation. Whilst it was a time for celebration, it was also a time for reflection. Today's Catlin Group is much different from the very small underwriting agency established at the end of 1984. However, the core values upon which Catlin was founded have not changed and are still embraced today. They are the foundations upon which the Group's success has been built over the past quarter-century.

Another constant has been the leadership and commitment by Stephen Catlin. A conspicuous feature of this has been Stephen's ability to recruit and retain talented individuals who share both his vision and his passion for the business. I salute Stephen and the entire Catlin team for their hard work on behalf of the Group's shareholders.

Catlin made good progress during 2010. Our strategy will allow the Group to continue to prosper during the current challenging phase of the insurance cycle, whilst leaving Catlin in a strong position to capitalise on opportunities when the overdue market correction arrives.

Sir Graham Hearne

Chairman

Chief Executive's Review

I am extremely proud of Catlin's performance during the past year. We have produced strong financial and underwriting results, and we have continued to increase value for our shareholders.

I am particularly pleased by the performance of our underwriting hubs outside the London/UK market. We have made a large investment over the past decade to build a global infrastructure that we believe will allow Catlin to grow profitably, particularly when wholesale markets are soft. I am happy to report that the Group's performance during 2010 demonstrates that our investment is now paying off, and I believe that it has positioned Catlin to grow profitably in the years ahead.

Underwriting performance

Catlin is first and foremost an underwriting company. To be successful, we must be able to underwrite profitably in both hard and soft market cycles and be able to withstand large losses when they do occur.

Net underwriting contribution - our primary measure of underwriting performance - increased by 5 per cent to US$683 million in 2010 (2009: US$651 million), even though both competition and catastrophe-related claims increased substantially during the year. This is an exceptional outcome.

Rates for most classes of business came under pressure during 2010, and weighted average premium rates decreased by 1 per cent across Catlin's underwriting portfolio (2009: 6 per cent increase). At the same time, the combination of the Chilean and New Zealand earthquakes and the December floods in Australia caused catastrophe losses to increase to US$218 million (2009: nil catastrophe losses).

Catlin was able to increase underwriting profits despite these challenges through increased underwriting selectivity and targeted, profitable growth from our non-London/UK underwriting hubs.

It is easy to produce good results during a hard market, but Catlin underwriters know that, as competition builds, portfolio management becomes increasingly important. During 2010 our underwriters became increasingly selective. We reduced gross premiums written by the London/UK underwriting hub for the fourth consecutive year as competition for London wholesale business increased. In addition, we reduced volumes across the Group for business classes such as long-tail Casualty and Aerospace for which rates have been under the most pressure.

Our focus on robust portfolio management is reflected in the Group's attritional loss ratio, a benchmark that excludes the impact of catastrophe and large single-risk losses. The attritional loss ratio decreased to 51.6 per cent in 2010 (2009: 53.7 per cent), the best performance since 2007, even though premium rates decreased across the business (see table below).

Attritional loss ratio 2007-2010

	Attritional loss ratio
2007	51.0%
2008	54.0%
2009	53.7%
2010	51.6%

The loss ratio - which includes both catastrophe and single-risk losses as well as releases from prior year loss reserves - decreased slightly to 57.5 per cent (2009: 57.6 per cent), a very good performance in the light of the surge in catastrophe-related claims.

The Group released US$144 million from prior year reserves during 2010 (2009: US$94 million), an amount equal to 3 per cent of opening reserves (2009: 2 per cent). The reserve release demonstrates favourable loss development in prior years and was within Catlin's expected range.

Whilst we have reduced the volume of London wholesale business we write, we have selectively increased the volume of business written by our Bermuda, US, Asia-Pacific, Europe and Canada underwriting hubs. These underwriting hubs provide Catlin with diverse sources of business that are not placed in the London wholesale market. We have made a significant investment over the past decade in these hubs because we realised that a diversified underwriting portfolio - by both region and class of business - would perform better as the market cycle softens than a book of business that is composed solely of London wholesale business.

The non-London/UK underwriting hubs grew profitably during 2010. These hubs now account for 46 per cent of Catlin's net underwriting contribution (2009: 39 per cent), whilst they produce 43 per cent of the Group's gross premiums written (2009: 37 per cent).

Overall, net underwriting contribution from the non-London/UK hubs increased by 25 per cent to US$317 million (2009: US$254 million), whilst gross premiums written by these hubs rose by 28 per cent to US$1.7 billion in 2010 (2009: US$1.4 billion).

Group-wide, gross premiums written increased by 10 per cent during 2010 to US$4.1 billion (2009: US$3.7 billion). Net premiums earned also increased by 10 per cent to US$3.2 billion (2009: US$2.9 billion).

Full analysis of the Group's 2010 underwriting performance is contained in the Underwriting Review.

Profit performance

Profits before tax decreased to US$406 million in 2010 from the record level in the previous year (2009: US$603 million). There were two primary factors that caused profits to decrease:

· Total investment return fell by US$207 million - or nearly 50 per cent - to US$212 million (2009: US$419 million). This performance is a function of the continued low interest rate environment and our belief that the Group's investment portfolio should remain liquid during a period of economic uncertainty.

· The increase in catastrophe-related claims. Catastrophe losses added 7.2 percentage points to the 2010 loss ratio (2009: 0 percentage points).

Net income to common shareholders amounted to US$337 million (2009: US$509 million). The return on net tangible assets amounted to 16.3 per cent (2009: 33.2 per cent), whilst return on equity was 12.5 per cent (24.3 per cent).

During the Group's initial public offering in 2004, we stated that our target was to provide returns that exceeded the risk-free rate by 10 percentage points over the course of an underwriting cycle. Since the IPO, Catlin has acceded that target. The average return on net tangible assets over the period amounts to 19.3 per cent, and return on equity during the period averaged 15.2 per cent. By comparison, the average annual risk-free rate (as measured by 12-month US dollar Libor) was 3.1 per cent.

Catlin's annual compounded performance against the risk-free rate over the past seven years is shown in table below.

Compounded return on net tangible assets 2004-2010

	Return on net tangible assets	Cumulative return on net tangible assets	6-month US dollar Libor	Cumulative 6-month US dollar Libor plus 10 percentage points
2004	21.8%	21.8%	2.1%	12.1%
2005	2.2%	24.5%	4.3%	28.2%
2006	28.2%	56.7%	5.3%	47.8%
2007	36.1%	117.4%	5.1%	70.2%
2008	(2.8%)	111.3%	3.1%	92.5%
2009	33.2%	181.5%	1.6%	114.7%
2010	16.3%	227.4%	0.9%	138.2%

Delivering shareholder value

Net tangible assets per share in sterling rose by 16 per cent to £4.24 per share (2009: £3.64 per share). The increase was 11 per cent in US dollar terms. Similarly, book value per share increased by 14 per cent to £5.41 per share (2009: £4.74 per share). The increase in book value per share in US dollars amounted to 9 per cent

Catlin has consistently increased the value provided to shareholders, as measured by the annual increase in net tangible assets per share plus dividends paid in sterling during a calendar year.

Growth in net tangible assets plus dividends paid (sterling)

	Net tangible assets (NTA) per share	Dividends per share paid during year	NTA per share plus dividends paid	% increase over prior year NTA per share
2007	2.88	0.22	3.10	36%
2008	3.17	0.23	3.40	18%
2009	3.64	0.24	3.88	22%
2010	4.24	0.26	4.50	24%

Global infrastructure

The Group continued to invest in its infrastructure during 2010 to provide new, profitable growth opportunities. Our most notable investment was the establishment of Catlin Re Switzerland. The Zurich-based company was established as a subsidiary of Catlin Bermuda with capital of approximately US$1.1 billion. Catlin Re Switzerland commenced underwriting for 1 January 2011, and I am pleased to report that the new company has received an enthusiastic welcome from brokers and clients.

The formation of Catlin Re Switzerland is a major development in Catlin's international distribution strategy as it provides the Group for the first time with an opportunity to write European reinsurance business that is not placed in the London and Bermuda markets. Catlin Re Switzerland is initially underwriting property and other classes of specialty reinsurance for European ceding companies as well as trade credit, surety and political risk reinsurance on a global basis.

A Bermuda branch of Catlin Re Switzerland has also been established, initially to underwrite reinsurance of various Catlin Group subsidiaries.

Catlin Re Switzerland has received financial strength ratings of 'A' from Standard & Poor's and A.M. Best, the same ratings assigned to the Group's other rated regulated entities.

Catlin established five new offices during 2010 in Melbourne, Miami, Montreal, Oslo and Vancouver, further increasing our distribution. The Group also acquired the book of professional indemnity and directors' & officers' liability business underwritten by Angel Underwriting Limited, a UK managing agent in Colchester. Catlin now operates 52 offices in 20 countries.

Conclusion

I am pleased with our performance in 2010. Our financial results were strong, especially in light of the catastrophe loss experience and the low interest rates which reduced investment return.

Through the years, our priority has been to build a business for the future. As underwriting cycles come and go, a successful insurance and reinsurance group must continually prepare for the challenges that lie ahead, investing in people and infrastructure. I am proud that Catlin has responded to this challenge. Our international hub structure has begun to make meaningful contributions to the bottom line. This structure, together with our disciplined underwriting approach, leaves the Group well positioned to prosper in the current competitive conditions and to take full advantage when conditions improve.

I am also proud of the people who work for Catlin. Not only do they work extremely hard, but they are extremely good at what they do. For example, in the aftermath of the Deepwater Horizon explosion, which caused great uncertainty in the Offshore Energy market, the Catlin energy underwriting team was repeatedly recognised for its leadership, level of talent and depth of expertise. Whilst it is still not clear what impact the disaster will have on the marketplace, I am confident that Catlin will benefit from the opportunities that will arise in the Energy market, not least due to the respect that our team has earned from clients and brokers.

Likewise, our claims team continues to win praise from brokers for the high levels of service it delivers. Catlin last year was again ranked by brokers in an independent survey as the top-performing claims operation in the London market. It was the third consecutive survey in which Catlin came out on top.

These are not isolated examples. Our employees' skill and dedication to the Group never ceases to amaze me, and I thank them for their hard work.

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

Stephen Catlin

Chief Executive

Key Performance Indicators

Catlin uses key performance indicators ('KPIs') to measure the Group's performance against its strategic objectives.

The Group has selected financial KPIs to measure the creation of shareholder value, shareholder returns and profitability, premium volume, underwriting performance, expense control and investment performance. Non-financial KPIs measure employee retention and claims service performance. All financial KPIs are relevant to the Group's compensation philosophy, and three of them are explicitly incorporated in the calculations of performance-related pay and employee share plans.

Book value per share plus dividends (US$)

	Book value per share	Dividends per share paid during year	Book value per share plus dividends
2006*	$7.05	$0.25	$7.30
2007	$8.38	$0.43	$8.81
2008	$6.61	$0.44	$7.05
2009	$7.68	$0.37	$8.05
2010	$8.34	$0.40	$8.74

Management believes that increase in book value per share plus dividends paid to shareholders during a calendar year is an appropriate measure of shareholder value creation. During 2010 shareholder value, as measured on this basis, increased by 14 per cent. The company aligns its Employee Performance Share Plan with the interests of shareholders by setting vesting conditions based on growth in book value per share plus dividends paid during rolling three- and four-year periods.

Net tangible assets per share plus dividends (US$)

	Net tangible assets per share	Dividends per share paid during year	Net tangible assets per share plus dividends
2006*	$4.46	$0.25	$4.71
2007	$5.73	$0.43	$6.16
2008	$4.63	$0.44	$5.07
2009	$5.90	$0.37	$6.27
2010	$6.53	$0.40	$6.93

Shareholder value is also measured by the annual increase in tangible book value per share plus the dividend paid to shareholders during the year. Growth in tangible book value per share more accurately assesses the Group's performance against its underwriting capital (excluding goodwill and other intangibles). During 2010 shareholder value, as measured on this basis in dollars, increased by 17 per cent.

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

	Return on equity	Return on net tangible assets
2006*	26.4%	28.2%
2007	22.9%	36.1%
2008	-1.9%	-2.8%
2009	24.3%	33.2%
2010	12.5%	16.3%

Catlin aims to achieve attractive returns for shareholders, with a target after-tax return on equity of 10 percentage points above the risk-free rate over an underwriting cycle. Catlin has exceeded this target on an annual basis in four of the past five years and on a cumulative basis over the period. Employees' profit-related bonuses are based on return on equity and profits before tax.

Income before income tax (US$m)

	Income before tax
2006*	$521
2007	$543
2008	($13)
2009	$603
2010	$406

Pre-tax profitability is an effective measurement of the combination of underwriting performance, expense control and investment return. The reduction in pre-tax profits during 2010 is primarily the result of the reduction in investment return, which reflects the current low interest rate environment. Also contributing to the reduction was more than $200 million in catastrophe-related losses, compared with a catastrophe-free year in 2009. As described earlier, pre-tax profits are part of the basis for profit-related bonus calculations.

Net premiums earned (US$m)

		Net premiums earned
2006*		$2,228
2007		$2,490
2008		$2,596
2009		$2,918
2010		$3,219

The Group considers net premiums earned as a relevant indicator of underwriting volume during an accounting period. Net premiums earned increased during 2010 by 10 per cent to more than US$3.2 billion, reflecting growth in the Group's underwriting portfolio outside of the London underwriting hub.

Total investment return (%)

	Total investment return
2006*	4.3%
2007	4.6%
2008	(1.4%)
2009	5.9%
2010	2.7%

Total investment return measures investment income plus realised and unrealised gains and losses in the asset portfolio. The Group's total investment return of 2.7 per cent during 2010 was a marked decrease from the record performance during 2009 and reflects both the low interest rate environment as well as Catlin's conservative and liquid investment strategy.

Loss ratio (%)

	Attritional loss ratio	Loss ratio
2006*	48.7%	50.0%
2007	51.0%	46.4%
2008	54.0%	62.9%
2009	53.7%	57.6%
2010	51.6%	57.5%

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is a measure of underwriting performance. The attritional loss ratio - which excludes catastrophe, large single-risk losses and reserve releases - is a measure of longer-term, sustainable underwriting profitability. The attritional loss ratio improved considerably in 2010, reflecting disciplined underwriting, whilst the loss ratio reflects the substantial catastrophe losses sustained during the year.

Expense ratio (%)

	Expense ratio
2006*	32.6%
2007	34.1%
2008	32.0%
2009	31.5%
2010	32.3%

The expense ratio measures the Group's policy acquisition costs and operating expenses as a percentage of net premiums earned. The increase in the expense ratio in 2010 to 32.3 per cent is primarily due to an increase in policy acquisition costs.

Employee turnover (%)

	Employee turnover
2006*	12.9%
2007	19.7%
2008	14.0%
2009	10.4%
2010	9.8%

Catlin seeks to attract and retain high-calibre employees, and the annual employee turnover rate measures the company's success in retaining staff. The employee turnover rate of 9.8 per cent in 2010 was the lowest in five years. Turnover among underwriting employees decreased to 3.8 per cent during 2010 (2009: 4.8 per cent).

Claims performance (%)

	Highly recommended
2006*	Survey not conducted
2007	25.0%
2008	Survey not conducted
2009	31.0%
2010	30.0%

Catlin's claims handling performance is measured by a now-annual study conducted by Gracechurch Consulting. Surveyed brokers are asked which London market insurer they would highly recommend to clients on the basis of the quality of claims service. Catlin remained the top-ranked insurer in the 2010 survey, with 30 per cent of brokers highly recommending Catlin's claims service. Catlin also ranked first in the 2007 and 2009 surveys.

* Catlin and Wellington combined

Underwriting Review

Catlin produced strong underwriting results during 2010, the result of its strict focus on bottom-line results.

Net underwriting contribution rose by 5 per cent to US$683 million (2009: US$651 million), despite a sharp increase in catastrophe-related losses and a more competitive global underwriting environment. The Group's loss ratio held steady at 57.5 per cent (2009: 57.6 per cent), whilst the attritional loss ratio - which excludes catastrophe and large single-risk losses as well as movements in prior year loss reserves - decreased to 51.6 per cent (2009: 53.7 per cent).

The underwriting hubs that Catlin has established outside the London/UK market provides the Group with the ability to access geographically diverse business in local markets, allowing it to select the most appropriate mix of risks at the correct price. This access to worldwide retail and wholesale business has enabled Catlin to increase premium volume and underwriting profitability at a time when conditions are competitive in the London wholesale market, Catlin's historic base.

Gross premiums written increased by 10 per cent during 2010 to US$4.1 billion, although gross premiums written by Catlin's London/UK hub decreased by 1 per cent. The non-London/UK underwriting hubs during 2010 produced 43 per cent of gross premiums written and 46 per cent of net underwriting contribution (2009: 37 per cent and 39 per cent, respectively).

Catlin's global, multi-hub underwriting structure also provides the Group with increased flexibility to meet the changing needs of assureds and their brokers. Catlin's structure also allows it to change capital allocation quickly so that underwriting is focused on those regions which offer the best margins.

Catlin's success during 2010 also results from its recognised technical excellence, both in underwriting and claims management. A key Catlin advantage is the use of consistent pricing models and dedicated actuarial support across underwriting teams.

Catastrophe/large loss experience

The Group incurred US$218 million in catastrophe-related losses during 2010 (2009: nil).

Overall, there were 950 individual events in 2010 that were categorised by Munich Re as natural catastrophes, significantly higher that the 10-year average of 785. 2010 included the second-highest number of natural catastrophe events in the past 30 years. More than 260,000 people died as a result of natural catastrophes in 2010, compared with 15,000 in 2009. The worst human toll was related to the January 2010 earthquake in Haiti, which resulted in at least 220,000 fatalities.

Catastrophes during 2010 produced estimated economic losses of US$252 billion and insured losses of US$38 billion, according to Aon Benfield. The large gap existed because many catastrophes - such as the Haiti earthquake - occurred in regions with low insurance penetration.

The ten catastrophes that produced the greatest insured losses accounted for approximately 60 per cent of total insured catastrophe losses are shown in the table below. Six of these were severe weather-related losses, with two significant flooding events and two major earthquakes. The table does not include the floods in Queensland, Australia, in December 2010.

Largest insured natural hazard events in 2010

Date	Event	Location	Estimated fatalities	Estimated structure claims	Estimated economic loss (US$bn)	Estimated insured loss (US$ bn)
27 February	Earthquake	Chile	521	1,500,000	30.0	8.5
27-28 February	Windstorm Xynthia	France, Portugal, Spain, Belgium, Germany	64	100,000	4.5	3.7
4 September	Earthquake	New Zealand	0	190,000	3.8	3.1
12-26 May	Severe Weather	US Plains, Midwest, Northeast, Tennessee Valley	0	230,000	2.8	2.0
30 April - 3 May	Severe Weather	US Mississippi Valley, Tennessee Valley, Southeast	32	75,000	3.0	1.5
22 March	Severe Weather	Western Australia	0	165,000	1.3	1.1
6 March	Severe Weather	Victoria, Australia	0	105,000	1.3	1.0
12-16 March	Flooding	Northeast US, Mid-Atlantic States	11	175,000	1.5	1.0
5-9 June	Flooding	France, Spain	27	45,000	1.0	1.0
5-6 October	Severe Weather	Southwest US	0	150,000	1.3	1.0
All other events					201.7	14.6
Total					$252	$38

Source: Aon Benfield

The largest insured catastrophe loss was the 27 February magnitude 8.8 earthquake near Maule, Chile, which killed more than 500 people, caused estimated economic damage of US$30 billion and estimated insured losses of US$8.5 billion.

The second major earthquake was the magnitude 7.1 tremor that struck the south island of New Zealand on 4 September. There were no direct fatalities, primarily due to New Zealand's strict building codes and the fact that the earthquake occurred in the early morning. Economic and insured losses for this event were estimated late in 2010 at $3.8 billion and $3.1 billion, respectively, but those estimates have increased substantially over the past several weeks.

Notably absent from the list of catastrophes producing significant insured losses are Atlantic windstorms. The 2010 Atlantic hurricane season was one of the busiest on record, as the 19 named windstorms exceeded the average by 70 per cent. It was the third highest number of named Atlantic storms on record. Ultimately, 12 of the storms reached hurricane strength, the second highest number in history. However, none of these storms made U.S. landfall as shown in the table below.

2004-2010 Atlantic hurricane seasons

	Named Atlantic windstorms	Named hurricanes	Major hurricanes	Hurricanes making US landfall
2004	13	9	5	8
2005	27	15	7	9
2006	9	5	2	0
2007	15	6	2	4
2008	17	8	5	6
2009	9	3	2	2
2010*	19	12	5	0

Source: Holborn Corporation

The increased hurricane activity was believed to have been driven by a combination of record high temperatures in Atlantic waters, favourable winds in the Eastern Atlantic and weak wind shear aided by the La Niña.

A third significant natural catastrophe in terms of insured value began in December 2010, when heavy rain produced by Tropical Cyclone Tasha caused a series of floods in the Australian state of Queensland, causing property damage to a wide area. At least 40 towns and more than 200,000 people were affected. Claims for a portion of this flooding - which caused significant damage to the area surrounding Rockhampton - are attributable to the 2010 accident year, whilst claims from the widespread flooding in Toowoomba and the state capital Brisbane will be treated as 2011 events.

At the time of writing it is too early to say what impact the recent Australian floods may have on pricing but it is expected that due to the relative size of expected losses any corrections in pricing will be localised and reflective of specific loss experience.

In addition to the catastrophe losses, Catlin also incurred US$98 million in what the Group categorises as 'large single-risk losses' during 2010. The most notable was the 20 April explosion and subsequent oil spill from the Deepwater Horizon drilling platform (also known as Macondo), in which 11 workers died.

Whilst the final cost of the disaster will not be known until liability claims are litigated or settled many years in the future, economic losses are estimated at approximately $40 billion, whilst insured losses could range from US$1 billion to US$3.5 billion. The relatively low level of insured losses results from the fact that BP plc - the primary owner/operator of the platform - does not buy insurance from the commercial market.

The deepwater drilling moratorium, which was implemented in the Gulf of Mexico following the disaster, was lifted in October, but only a limited amount of deepwater activity has resumed in the Gulf.

Rate movements

Average weighted premium rates across the Group's underwriting portfolio decreased by 1 per cent during 2010 (2009: 6 percent increase). The rate decrease was similar for both catastrophe-exposed and non-catastrophe classes of business. This performance was broadly in line with the Group's expectations at the beginning of the year.

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

Rating indices for catastrophe and non-catastrophe business classes 1999-2010

	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Catastrophe classes	250%	253%	230%	251%	257%	206%	207%	213%	194%	135%	107%	100%
Non-catastrophe classes	192%	194%	188%	190%	200%	205%	208%	200%	175%	136%	103%	100%
All classes	210%	212%	200%	209%	217%	204%	206%	204%	181%	135%	105%	100%

Rating index base = 100% in 1999

The 1 per cent decrease in weighted average rates for catastrophe-exposed business was largely driven by reinsurers' continued appetite for diversified catastrophe risk and the limited impact on pricing from the Chile or New Zealand earthquakes, which produced only local pricing corrections. Despite the small decrease in average rates, pricing for catastrophe-exposed risks is still at a historically high level.

Although rates for Energy risks improved following the Deepwater Horizon explosion, the upward movement was less than originally anticipated, due to the deepwater drilling moratorium and the subsequent lack of drilling activity in the Gulf of Mexico.

Average weighted premium rates for non-catastrophe classes also decreased by 1 per cent. Rates for these business classes softened as the year progressed as shown in the table below, driven by continued pressure on wholesale Casualty, Aviation and War & Political Risks/Specialty classes. In 2009 rates for these classes on average rose as the year progressed.

Rate movements for non-catastrophe business classes 2009-2010

	2010	2009
January	0%	2%
February	0%	4%
March	1%	4%
April	1%	2%
May	0%	3%
June	(1%)	3%
July	(1%)	3%
August	(3%)	5%
September	(2%)	4%
October	(2%)	3%
November	(1%)	5%
December	(3%)	5%

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

Rating indexes for product groups

	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Aerospace	111%	114%	107%	109%	121%	130%	134%	134%	135%	116%	107%	100%
Casualty	203%	203%	197%	204%	215%	227%	236%	222%	171%	138%	101%	100%
Energy/Marine	251%	249%	230%	245%	255%	229%	224%	220%	187%	135%	107%	100%
Property	196%	198%	192%	207%	220%	194%	198%	203%	188%	137%	107%	100%
Reinsurance	234%	237%	219%	231%	230%	192%	190%	188%	169%	123%	105%	100%
Specialty/War & Political Risk	202%	211%	206%	200%	207%	210%	217%	221%	209%	145%	104%	100%

The table below shows weighted rate movements by product group for the past two years.

Weighted average rate movements by product group 2009-2010

	2010	2009
Aerospace	(3%)	6%
Casualty	0%	3%
Energy/Marine	1%	8%
Property	(1%)	3%
Reinsurance	(1%)	8%
Specialty/ War & Political Risk	(4%)	2%

Although average weighted Casualty rates increased slightly for the year, rate adequacy for the Casualty product group decreased as the year progressed, most notably for London wholesale business. The net rate increase recorded for 2010 was primarily driven by modest increases in the specialty short-tail Casualty book, most notably for the UK Motor account.

Whilst the Airline insurance market continued to incur annual losses that exceed premium, rates for this class of business - the largest business class within the Aerospace product group - were stagnant during 2010, with average rates decreasing by 3 per cent.

Rates also decreased on average for classes included in the Specialty/War & Political Risk portfolio. The decrease primarily reflects price reductions in Credit and related classes of business, for which rates reached near-record levels in the aftermath of the 2008 financial crisis.

Gross premiums written

Gross premiums written by the Group increased by 10 per cent to US$4.1 billion during 2010 (2009: US$3.7 billion).

The growth was primarily produced by the five non-London/UK underwriting hubs, whose combined gross premiums written increased 28 per cent. These hubs accounted for 43 per cent of the Group's 2010 gross premiums written (2009: 37 per cent).

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

Gross premiums written by financial reporting segment 2006-2010 (US$m)

	2010	2009	2008	2007	2006
London	2,323	2,347	2,428	2,605	2,676
Bermuda	502	421	392	312	199
US	707	581	348	297	305
International	537	366	269	147	79
Total	4,069	3,715	3,437	3,361	3,259

The proportion of the International segment's premium volume produced by the Asia-Pacific, Europe and Canada underwriting hubs during this period is shown in the table below.

Gross premiums written by international underwriting hubs 2006-2010(US$m)

	2010	2009	2008	2007	2006
Asia-Pacific	217	129	105	67	40
Europe	229	175	111	39	17
Canada	91	62	53	41	22
Total	537	366	269	147	79

The reduction in gross premiums written by the London/UK underwriting hub is the result of continued selective underwriting for business classes written in the London wholesale market, where rates have remained under pressure, particularly for Aviation and long-tail Casualty business. Whilst premium volume underwritten by the London/UK hub decreased during 2010, the hub's loss ratio improved despite the increased catastrophe losses, which validates the Group's strategy for this hub.

The growth in gross premiums written by the US, Asia-Pacific, Europe and Canada underwriting hubs is the result of Catlin's strategic investment in offices in these regions. As underwriting teams hired in recent years become more established in their respective markets, premium volume increases. As these underwriters are now seeing a broader spread of business, they can be selective when underwriting, ensuring that top-line growth does not damage bottom-line profits.

In addition, the Group is expanding the product range underwritten by these hubs. For example, the establishment of a Norwegian Energy team in Catlin's Oslo office allows Catlin to underwrite profitable energy business that is usually not brokered on a wholesale basis to other insurance markets. Another example is the development of Agriculture insurance and reinsurance products which have been introduced in the past two years across the various underwriting hubs.

The growth in the Bermuda underwriting hub during 2010 resulted from increased allocation of the Group's Property Reinsurance capacity to the hub as well as an increase in premiums from specialty insurance and reinsurance products written by Catlin Bermuda.

The Group continued to build its global capabilities during 2010. The most notable development was the formation of Catlin Re Switzerland with capital of approximately US$1.1 billion. Catlin Re Switzerland from 1 January 2011 is underwriting property and other classes of specialty reinsurance for European ceding companies as well as trade credit, surety and political risk reinsurance on a global basis.

An office was opened in Melbourne to expand Catlin's presence in the Australian market. Catlin Canada established offices in Montreal and Vancouver, staffed by teams of experienced professionals. A Miami office targets treaty reinsurance business in the Caribbean and Central and South America. Catlin also acquired the operations of Angel Underwriting Limited, a UK-based underwriting manager specialising in professional indemnity and directors' & officers' liability insurance.

Underwriting performance

The Group's loss ratio held steady during 2010 at 57.5 per cent (2009: 57.6 per cent), which produced a net underwriting contribution of US$683 million, a 5 per cent increase (2009:US$651 million). This is a significant achievement, considering the increase in catastrophe losses incurred by the Group during the year.

Catastrophe losses accounted for 7.2 per cent of the loss ratio (2009: nil). The Chile earthquake accounted for approximately two-thirds of the catastrophe losses, with the New Zealand earthquake accounting for US$46 million and the December floods in Australia accounting for the remainder.

The December 2010 Australian floods produce a range of outcomes. Recent notifications suggest that final settlements for Catlin could be less than US$20 million.

Large single-risk loss experience improved during 2010 to US$98 million after a record level of large single risk losses the previous year (2009: US$207 million). The 2010 experience was closer to the long-term average for these types of losses.

The Deepwater Horizon explosion accounted for the majority of large single-risk losses during 2010, followed by several large aviation losses.

The attritional loss ratio - which excludes catastrophe and large single risk losses - decreased to 51.6 per cent (2009: 53.7 per cent), despite the overall reduction in average weighted premium rates during 2010. This performance reflects Catlin's continuing underwriting discipline.

An analysis of the components of the loss ratio in 2009 and 2010 is shown in the table below. The Group released US$144 million from prior year loss reserves during 2010 (2009: US$94 million), equivalent to 3 per cent of opening reserves (2009: 2 per cent). The prior year reserve release reduced the 2010 loss ratio by 4.5 percentage points (2009: 3.2 percentage points).

Components of loss ratio 2009-2010

	2010	2009
Attritional loss ratio	51.6%	53.7%
Catastrophe losses	7.2%	--
Large single-risk losses	3.2%	7.1%
Release of reserves	(4.5%)	(3.2%)
Reported loss ratio	57.5%	57.6%

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

2009 Underwriting performance by hub 2009-2010 (US$m)

	London/UK	Bermuda	US	International	Group
2010
Gross premiums written	2,323	502	707	537	4,069
Net premiums written	1,830	438	572	478	3,318
Net premiums earned	1,827	427	538	427	3,219
Underwriting contribution	366	151	95	71	683
Loss ratio	57.6%	41.5%	64.8%	64.2%	57.5%
Attritional loss ratio	52.3%	29.5%	59.7%	60.2%	51.6%
2009
Gross premiums written	2,347	421	581	366	3,715
Net premiums written	1,984	371	487	326	3,168
Net premiums earned	1,891	348	409	270	2,918
Underwriting contribution	397	123	105	26	651
Loss ratio	58.4%	43.0%	56.8%	72.4%	57.6%
Attritional loss ratio	54.6%	41.1%	57.0%	59.2%	53.7%

Meaningful underwriting contribution was produced by all four reporting segments. Whilst the both the loss ratio and the attritional loss ratio of the London/UK hub decreased during 2010, underwriting contribution also decreased by approximately 8 per cent, primarily due to the catastrophe losses sustained by the hub.

The Bermuda hub improved both its loss ratio and underwriting contribution in 2010 despite increased catastrophe losses. Significant improvement was seen in the attritional loss ratio, which was the result of improving loss experience across a number of business classes.

The US attritional loss ratio increased slightly due to planned changes to the business mix over the year. The loss ratio for the International hubs improved and underwriting contribution increased significantly during 2010.

Product groups

Catlin writes most classes of commercial insurance and reinsurance through six product groups. The gross premiums written by the major categories within each product group are shown in the tables below.

Gross written premiums by product group 2009-2010 (US$m)

Aerospace Product Group

	2010	2009
Aviation	400	416
Satellite	40	74
Total	440	490

Casualty Product Group

	2010	2009
General Casualty	316	331
Professional/Financial	391	351
Marine	87	96
Motor	48	19
Total	842	797

Energy/Marine Product Group

	2010	2009
Upstream Energy	191	194
Hull	147	136
Cargo	105	91
Specie	73	74
Downstream Energy	63	51
Marine Liability	28	31
Total	607	577

Property Product Group

	2010	2009
International	256	189
US	113	96
Binding Authorities	102	93
Total	471	378

Reinsurance Product Group

	2010	2009
Non Proportional Property	659	610
Proportional Property	293	178
Marine	105	137
Casualty	167	132
Specialty	65	59
Total	1,289	1,116

Specialty/War & Political Risks Product Group

	2010	2009
War & Political Risks, Terrorism & Credit	245	188
Accident & Health	92	86
Equine/Livestock	64	67
Contingency	19	14
Total	420	355

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

Underwriting results by product group (US$m)

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	Rate change
2010
Aerospace	440	348	405	70	61%	(3%)
Casualty	842	651	647	(13)	87%	0%
Energy/Marine	607	464	447	92	55%	1%
Property	471	379	371	73	51%	(1%)
Reinsurance	1,289	1,102	1,043	303	52%	(1%)
Specialty/War & Political Risks	420	406	355	156	36%	(4%)
2009
Aerospace	490	412	365	77	60%	6%
Casualty	797	678	648	(27)	86%	3%
Energy/Marine	577	469	470	98	55%	8%
Property	378	300	282	56	47%	3%
Reinsurance	1,116	994	950	387	41%	9%
Specialty/War & Political Risk	355	339	333	65	60%	1%

Significant losses were sustained by the Energy/Marine product group relating to the Deepwater Horizon explosion, but this was offset by a benign US windstorm season and better than expected underlying profitability. Although there were some Energy pricing corrections following the Deepwater Horizon loss, the moratorium on US deepwater drilling in the Gulf of Mexico had a significant impact on the scale of the opportunity.

The Marine portfolio continued to grow worldwide as additional Marine business was written outside of the London/UK hub. The portfolio delivered a strong underwriting contribution despite a rise in the frequency of Marine Hull claims relating to long-term repairs following recession-driven lay-ups.

The Casualty product group continued to follow the Group's strategy of 'Long on Short Tail and Short on Long Tail'. The focus continued to be on business classes and regions for which rate adequacy is good, most notably within short-tail niche Professional and Financial lines. Conversely, there have been further reductions in long-tail Casualty underwriting, primarily relating to London wholesale business. Net premiums earned decreased by 17 per cent for these classes.

Catlin's international infrastructure - including its US offices - allows the Group to continue to selectively underwrite a broad range of Casualty accounts outside the competitive London market. This global footprint also better positions the Group to take advantage of the improvement in conditions in the Casualty market as they arise.

The Aerospace product group continued to encounter challenging market conditions, both in terms of competition and high loss levels. The Group is pro-actively managing this portfolio to maximise profitability, especially within the Airline book of business where global market losses exceeded premium volume during 2010. The volume of Satellite business also decreased, which was the result of increased underwriting selectivity as pressure on rates continued. Whilst Aerospace gross premiums written decreased by 10 per cent during 2010, the loss ratio remained steady and the product group produced a meaningful underwriting contribution.

Property Treaty reinsurance continues to be the largest component of the Reinsurance product group's portfolio. Whilst the product group's loss ratio rose due to the increased catastrophe loss experience during 2010, the loss ratio relating to the non-catastrophe portion of the Reinsurance portfolio - which includes the Group's growing Agricultural reinsurance account - improved significantly. During the year, the Group leveraged its expertise in this business class and expanded the amount of Agricultural reinsurance premiums written across the underwriting hubs.

The Group manages its catastrophe reinsurance aggregate globally, both to satisfy the needs of clients and to maximise returns. For example, the Group during 2010 shifted aggregate capacity from London to Bermuda.

Gross premiums written by the Property product group also rose during 2010 due to increased traction in Property and Construction classes, and the further expansion of Property underwriting in the non-London/UK hubs. The increase in Construction premiums was driven by renewed activity as national economies began to recover from the financial crisis.

While the Property product group was also impacted by the rise in catastrophe losses, the loss ratio increased only slightly whilst underwriting contribution increased by 30 per cent.

The Specialty/War & Political Risk product group - which includes the Group's Credit insurance/reinsurance portfolio - posted a strong performance, with underwriting contribution increasing by more than 100 per cent.

Whereas the Credit account's 2009 results were impacted by claims arising from the global economic crisis, 2010 saw profitable Credit-related business earn through at significantly corrected pricing levels. Credit insurance rates decreased during 2010 following this price correction, but overall rates remain adequate and further opportunities exist in the class.

Strong contributions from the Personal Accident, Political Risk and Terrorism accounts contributed to the strong Specialty/War & Political Risk results.

Risk transfer

The goal of Catlin's risk transfer programme is to reduce the Group's earnings volatility and improve capital efficiency. The programme is designed and executed centrally in order to maximise effectiveness. The key elements of the programme include:

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

· Risk transfer to capital markets and/or collateralised counterparties to increase the term of protection, diversify and improve greater counterparty financial security, and reduce the volatility in risk transfer costs over time; and

· Proportional and facultative protection to enhance the Group's gross underwriting capacity.

Catlin's Newton Re transactions - which transferred underwriting risk to capital markets - expired in 2010. They have been replaced with traditional and collateralised risk transfer protections. The Group continues to monitor the state of the insurance- linked securities market and will sponsor such transactions in the future when appropriate.

2011 Outlook

Although the importance of the 1 January renewal season has been reduced for Catlin due to the product and geographic diversification, it remains a significant period for the London wholesale market and in other markets.

1 January is traditionally the most important renewal date for Property Treaty reinsurance. Despite the increase in catastrophe losses in 2010 and the early predictions of significant Atlantic windstorm activity in 2011, rates for Catlin's catastrophe-exposed portfolio have been broadly flat. Rates for loss-impacted accounts were increased at renewal, which offset rate reductions of between 5 per cent and 10 per cent for loss-free accounts.

The Group has held back a portion of its catastrophe aggregate to ensure that it will be able to take advantage of opportunities should pricing improve as the year progresses. For example, there could be some pricing changes following the February release of new property catastrophe models by RMS, a leading vendor. It is widely believed that the updated software will increase modelled loss estimates, triggering corrective pricing at subsequent renewals.

During January 2011 widespread flooding continued in the Australian state of Queensland, affecting Toowoomba, Brisbane and other locations. The state of Victoria also experienced flooding. These 2011 events are initially estimated to produce losses for the Group amounting to approximately US$50 million, net of reinsurance and reinstatements. There is considerable uncertainty regarding the ultimate cost of these events.

January is not as significant a renewal season for direct classes of business. Rates for these classes in aggregate have also remained broadly flat. Capacity still remains abundant for many of these classes, and it is unlikely that market conditions will improve considerably absent an extreme event or a marked change in the behaviour of insurers which, unlike Catlin, value market share over underwriting profitability.

Gross premiums written as at 31 January 2011 increased 14 per cent (31 January 2010: 11 per cent), which met the Group's expectations. The increase was 16 per cent on a constant exchange rate basis.

Premium volume growth in percentage terms is likely to be smaller during the full year as compared with January, largely due to the impact of the Group's new book of European reinsurance business, for which 1 January is a major renewal date. A significant portion of the premium growth in January 2011 was contributed by European reinsurance business, largely underwritten by Catlin Re Switzerland, which produced gross premiums written of nearly US$80 million.

As the soft phase of the underwriting cycle continues, Catlin will continue to emphasise the bottom line. Catlin's diverse structure provides the Group with the flexibility to increase premium volume in regions and business classes where rate adequacy remains strong, but the Group will not sacrifice profitability for growth's sake.

When an upturn in the market does occur, Catlin is in a strong position. Our global footprint will allow Catlin to exploit opportunities where they first arise. In addition, our investment in underwriting teams outside of the London market provides Catlin with the flexible infrastructure to write increased volumes of business as rates improve.

Financial Review

The following pages contain commentary regarding Catlin's consolidated financial statements for the year ended 31 December 2010, which are prepared in accordance with Accounting Principles Generally Accepted in the United States ('US GAAP').

Consolidated Results of Operations (US$m)

	2010	2009	% change
Revenues
Gross premiums written	4,069	3,715	10%
Reinsurance premiums ceded	(751)	(547)	37%
Net premiums written	3,318	3,168	5%
Change in net unearned premiums	(99)	(250)	(60%)
Net premiums earned	3,219	2,918	10%

Net investment return	205	414	(50%)
Change in fair value of catastrophe swaps	(15)	(31)	(52%)
Net gains on foreign currency	3	30	(90%)
Other income	2	4	(50%)
Total revenues	3,414	3,335	2%
Expenses
Losses and loss expenses	1,852	1,681	10%
Policy acquisition costs	684	586	17%
Administrative and other expenses	457	449	2%
Financing costs	15	16	(6%)
Total expenses	3,008	2,732	10%

Income before income taxes	406	603	(33%)
Income tax expense	(25)	(50)	50%
Net income	381	553	(31%)
Preferred share dividend	(44)	(44)	-
Net income available to common stockholders	337	509	(34%)

Loss ratio¹	57.5%	57.6%
Expense ratio²	32.3%	31.5%
Combined ratio³	89.8%	89.1%
Tax rate⁴	6.3%	8.3%
Return on net tangible assets⁵	16.3%	33.2%
Return on equity ⁶	12.5%	24.3%
Total investment income yield ⁷	2.7%	5.9%

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

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

3 Total of loss ratio plus expense ratio

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

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

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

7 Calculated as total investment income divided by average of opening and closing invested assets for the year.

Catlin's income before tax amounted to US$406 million in 2010, a 33 per cent reduction compared with the previous year (2009: US$603 million). This result was influenced by several key factors:

· A 10 per cent increase in gross premiums written to US$4.1 billion.

· A 10 per cent increase in net premiums earned to US$3.2 billion.

· A 5 per cent increase in net underwriting contribution to US$683 million;

· A loss ratio of 57.5 per cent, marginally lower than the previous year (2009: 57.6 per cent) despite US$218 million in catastrophe losses incurred during 2010 (2009: nil). The attritional loss ratio of 51.6 per cent was the lowest since 2007 (2009: 53.7 per cent).

· A significantly lower investment return in 2010 compared with 2009. The total investment return amounted to 2.7 per cent (2009: 5.9 per cent).

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

Income before income taxes (US$m)

	2010	2009	% change
Net underwriting contribution	683	651	5%
Total investment return	212	419	(49%)
Administrative expenses - controllable	(289)	(269)	7%
Administrative expenses - non controllable	(67)	(64)	5%
Administrative expenses - other expenses	(101)	(116)	(13%)
Financing and other	(35)	(48)	(27%)
Foreign exchange	3	30	(90%)
Income before income taxes	406	603	(33%)

The following commentary compares Catlin's 2010 financial results with the results for 2009.

Gross premiums written

Gross premiums written increased by 10 per cent to US$4.1 billion (2009: US$3.7 billion). The impact of measuring the increase using constant exchange rates is insignificant.

Gross premiums written by the Group's Bermuda, US, Asia-Pacific, European and Canadian underwriting hubs increased substantially, rising by 28 per cent to US$1.7 billion (2009: US$1.4 billion). These underwriting hubs accounted for 43 per cent of the total gross premiums written (2009: 37 per cent).

Gross premiums written by the London/UK underwriting hub decreased by 1 per cent to US$2.32 billion (2009: US$2.35 billion).

Rates decreased slightly during the period for nearly all classes of business underwritten by Catlin, with average weighted premium rates falling by 1 per cent; average weighted premium rates increased by 6 per cent for business incepting during 2009.

Seventy-four per cent of gross premiums written were denominated in US dollars, 9 per cent in euros, and 16 per cent in sterling and other currencies.

Reinsurance

Reinsurance premiums ceded increased by US$204 million to US$751 million (2009: US$547 million). Reinsurance premiums ceded are analysed in the table below.

Reinsurance premiums ceded (US$m)

	2010	Percentage of GPW	2009	Percentage of GPW
Third-party protections	753	18.5%	523	14.1%
Names' quota share	(2)	0.0%	24	0.6%
Reinsurance premiums ceded	751	18.5%	547	14.7%
Element of multi-year contracts relating to future periods	(76)	(1.9%)	(14)	(0.4%)
Adjusted reinsurance premiums ceded	675	16.6%	533	14.3%

Third-party reinsurance costs expressed as a percentage of written premiums were approximately 4 percentage points higher than in 2009. The increase was attributable to the purchase of additional contracts, a number of which provide coverage for 2010 and future years. The element of the multi-year contracts which relates to future periods was approximately US$76 million in 2010 (2009: US$14 million).

Net premiums earned

Net premiums earned increased by 10 per cent to US$3.2 billion (2009: US$2.9 billion). This increase, which was in line with the Group's expectations, was largely due to increased gross premiums written and premium rate increases achieved on business written in 2009 that was earned in 2010. Embedded growth arising from the 2006 acquisition of Wellington Underwriting plc continued to contribute a portion of the increase, arising from of the cessation of quota share reinsurance provided to Catlin Syndicate by some of the third-party Lloyd's Names that had formerly provided capital to Wellington Syndicate 2020.

The Group's loss ratio decreased to 57.5 per cent during 2010 (2009: 57.6 per cent).

The Group incurred three catastrophe losses in 2010: the Chilean earthquake in February, the New Zealand earthquake in September and Australian floods in December. Losses relating to these catastrophe losses amounted to approximately US$218 million net of reinsurance and reinstatement premiums, increasing the loss ratio by 7.2 percentage points.

The decrease in the Group's loss ratio during 2010 is analysed in the table below

Analysis of loss ratio

	2010	2009
Attritional loss ratio	51.6%	53.7%
Catastrophe losses	7.2%	-
Large single-risk losses	3.2%	7.1%
Release of reserves	(4.5%)	(3.2%)
Reported loss ratio	57.5%	57.6%

Large single-risk losses increased the loss ratio by 3.2 percentage points in 2010 (2009: 7.1 percentage points). Approximately half of these losses related to claims arising from the Deepwater Horizon oil spill in the Gulf of Mexico in April.

The Group released US$144 million from prior year loss reserves during 2010, an amount equating to 3 per cent of opening reserves (2009: US$94 million or 2 per cent).

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 32.3 per cent (2009: 31.5 per cent). The components of the expense ratio and other expenses are analysed in the table below.

Analysis of expense ratio

US$m	2010	Components of expense ratio	2009	Components of expense ratio

Policy acquisition costs	684	21.3%	586	20.1%
Administrative expenses
Controllable expenses	289	9.0%	269	9.3%
Non controllable expenses	67	2.0%	64	2.1%
Other expenses	101	-	116	-
Administrative and other expenses	457	11.0%	449	11.4%
	1,141	32.3%	1,035	31.5%

The policy acquisition cost ratio increased to 21.3 per cent (2009: 20.1 per cent). Administrative expenses represent 11.0 percentage points of the overall expense ratio (2009: 11.4 percentage points).

When calculating the expense ratio, Catlin excludes 'other expenses' which represent profit-related bonuses, employee share option schemes and certain Group corporate costs to allow the expense and combined ratios to give a closer representation of the costs of underwriting. The decrease in other expenses relate to reduced levels of management and staff bonuses in 2010, which are based on both income before tax and the return on equity achieved by the Group. These reductions have been partially offset by additional accommodation costs incurred in 2010 to facilitate the relocation of the Group's London office in the first half of 2011.

Net underwriting contribution

The 2010 net underwriting contribution of US$683 million represents a 5 per cent increase on 2009 (2009: US$651 million). Of the total underwriting contribution, 54 per cent was produced by the London underwriting hub; 46 per cent was produced by the Group's other underwriting hubs (2009: 61 per cent London, 39 per cent other).

Total investment return

Total investment return amounted to 2.7 per cent (2009: 5.9 per cent). The table below summarises the total investment return during the year.

Total investment return (US$m)

	2010	2009
Total investments and cash as at 31 December	8,021	7,693

Investment income	147	187
Net gains on fixed maturities and short-term investments	46	91
Net gain on investments in funds	19	141
Total investment return	212	419
Investment expenses	(7)	(5)
Net investment return	205	414

Change in fair value of catastrophe swaps

As part of its third-party reinsurance arrangements, the Group in previous years entered into catastrophe swap arrangements with certain special purpose entities. One such arrangement expired during 2010; another expired during 2009. Neither catastrophe swap was triggered. Information about these arrangements is contained in Note 8 to the Financial Statements.

The change in fair value of these swaps is shown in the table below.

Change in the fair value of derivatives (US$m)

	2010	2009
Premiums in respect of catastrophe swaps	(14)	(26)
Change in value of catastrophe swaps	(1)	(5)
	(15)	(31)

Net gains on foreign currency

Catlin reported a gain on foreign currency exchange amounting to US$3 million (2009: US$30 million). Catlin reports in US dollars but undertakes significant transactions in various currencies. Exchange rate movements during the year have resulted in the net exchange gain on these currency positions.

Financing costs

Financing costs comprise interest and other costs in respect of bank financing, together with costs of subordinated debt. Dividends relating to preferred shares are treated as an appropriation of net income and are not included in financing costs.

Income tax expense

The Group's effective tax rate was 6.3 per cent (2009: 8.3 per cent). The principal driver of the effective tax rate continues to be the jurisdiction of the underwriting entities in which profits and losses arise.

Approximately 1.4 percentage points of the reduction is attributable to a 1 per cent reduction in the UK corporation tax rate to 27 per cent which will be applicable from April 2011. The effect of this change is reflected in the deferred tax provisions made for 2010.

Net income available to common stockholders

After payment of dividends amounting to US$44 million to holders of Catlin's non-cumulative perpetual preferred shares (2009: US$44 million), net income available to common shareholders amounted to US$337 million (2009: US$509 million). The return on net tangible assets was 16.3 per cent (2009: 33.2 per cent); the return on equity amounted to 12.5 per cent (2009: 24.3 per cent).

Balance Sheet

A summary of the balance sheet at 31 December 2010 and 2009 is set out in the table below.

Summary of Consolidated Balance Sheet (US$m)

	2010	2009	% change
Investments and cash	8,021	7,693	4%
Securities lending collateral	12	15	(20%)
Intangible assets and goodwill	716	718	-
Premiums and other receivables	1,322	1,133	17%
Reinsurance recoverable	1,229	1,441	(15%)
Deferred policy acquisition costs	354	292	21%
Other assets	428	390	10%

Loss reserves	(5,549)	(5,392)	3%
Unearned premiums	(1,886)	(1,724)	9%
Subordinated debt	(93)	(97)	(4%)
Reinsurance payable	(559)	(653)	(14%)
Other liabilities	(535)	(523)	2%
Securities lending payable	(12)	(15)	(20%)
Stockholders' equity	3,448	3,278	5%

The major items on the balance sheet are analysed below.

Investments and cash

Investments and cash increased by 4 per cent to US$8.0 billion (2009: US$7.7 billion). The increase is driven by cash flow from the Group's insurance operations and positive investment performance.

Intangible assets and goodwill

In line with management's focus on underwriting hubs, intangible assets have been attributed to segments to match those assets to relevant business flows. From 1 January 2010 the value of the capacity of the Catlin Syndicate has been measured in US dollars as this reflects that the majority of business written in the Syndicate is in US dollars.

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

Intangible assets and goodwill (US$m)

	2010	2009
Purchased Lloyd's syndicate capacity	634	634
Distribution network	1	2
Surplus lines licenses	5	6
Goodwill on acquisition of Wellington	60	62
Other goodwill	16	14
Intangible assets and goodwill	716	718
Associated deferred tax (included within other liabilities)	(94)	(96)
Intangible assets and goodwill net of deferred tax	622	622

Premiums and other receivables

Premiums and other receivables increased during 2010 by US$189 million or 17 per cent. The increase was due partly to increased gross premiums written and also to a change in accounting policy on long-term risk contracts, whereby policies covering a period longer than 18 months were fully recognised in 2010 and no longer signed forward to future underwriting years of account.

Reinsurance recoverable

Amounts receivable from reinsurers and anticipated recoveries decreased by US$212 million or 15 per cent. Reinsurance recoverables represent 36 per cent of stockholders' equity (2009: 44 per cent).

Deferred policy acquisition costs

Deferred policy acquisition costs represented 19 per cent of unearned premiums at 31 December 2010 (2009: 17 per cent).

Loss reserves

Gross loss reserves have increased by US$157 million or 3 per cent during 2010. Approximately 95 per cent of net reserves relate to the 2003 and later accident years. The Group released US$144 million from prior year loss reserves during 2010, an amount equal to approximately 3 per cent of opening net reserves.

Unearned premiums

Unearned premiums have increased by US$162 million or 9 per cent during the year.

Notes payable and subordinated debt

Subordinated debt represented a total of US$68 million and €18 million in variable rate unsecured subordinated notes. The interest payable on the notes is based on market rates for three-month deposits in US dollars plus a margin of up to 317 basis points. The notes, which are redeemable in 2011 at the earliest, qualify as 'Lower Tier II' capital under the rules of the Financial Services Authority in the UK. There was no change to the subordinated debt during the year, and the balance sheet movement primarily represented foreign exchange revaluation.

Reinsurance payable

Reinsurance payable has decreased by US$94 million or 14 per cent compared with 31 December 2009. This decrease relates to a commutation and settlement of quota share reinsurance provided by the former Wellington Names on the 2007 underwriting year of account in Syndicate 2003 (US$159 million). Excluding this reinsurance payable has increased by US$65 million or 10 percent.

Stockholders' equity

The table below shows the principal components of the change in stockholders' equity during 2010 and 2009:

Change in stockholders' equity (US$m)

	2010	2009
Stockholders' equity, 1 January	3,278	2,469
Net income	381	553
Common share dividends declared	(138)	(115)
Preferred share dividends declared	(44)	(44)
Currency translation gain	5	112
Rights Issue	-	289
Treasury stock purchased	(57)	(8)
Stock compensation expense	23	22
Stockholders' equity, 31 December	3,448	3,278

The currency translation gain is analysed in the table below:

Analysis of currency translation gain (US$m)

	2010	2009
Foreign exchange, excluding intangible assets	8	52
Intangible assets - revaluation (losses)/gains on sterling balances	(3)	60
	5	112

The significant currency translation gain in 2009 resulted from the significant portion of the Group's stockholders' equity being represented by sterling entities within the Group. Sterling entities such as the Catlin Syndicate, Catlin UK and certain intermediate holding companies comprised a significant portion of Catlin's consolidated stockholders' equity. A currency translation gain arose when the sterling net assets of these companies were translated at year-end into the Group's reporting currency, which is US dollars.

The largest sterling assets owned by the Group were the intangibles arising on the acquisition of Wellington and the purchase of Wellington syndicate capacity from Lloyd's Names, both of which primarily related to the purchase of sterling assets. As a result, more than 62 per cent of the currency translation gain in 2009 related to intangible assets.

The split of net assets by currency is analysed in the table below,

Analysis of net assets by currency

US$m	Amount	US$	Sterling	Other	Total
Net tangible assets¹	2,236	78%	6%	15%	100%
Intangible assets	622	89%	11%	--	100%
Net assets¹	2,858	81%	7%	12%	100%

1 Excludes preferred shares

In line with management's focus on underwriting hubs, intangible assets have been attributed to segments to match those assets to relevant business flows. From 1 January 2010, the syndicate capacity has been measured in US dollars as this reflects that the majority of business written in the Syndicate is in US dollars. This has led to decreased foreign exchange movements in 2010.

In March 2009 the Group completed a Rights Issue. 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. Proceeds, after issue costs, amounted to £200 million (US$289 million), of which approximately half was converted to US dollars.

In January 2007 Catlin Bermuda issued US$600 million of non-cumulative perpetual preferred shares. Dividends are paid semi-annually at a rate of 7.249 per cent up to 2017 when there is a 100 basis point step up in the interest cost based on LIBOR at that time. These shares represent a capital instrument which is eligible as regulatory capital for Catlin Bermuda and innovative 'Tier 1' capital under the rules of the Financial Services Authority in the UK.

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

Net tangible assets (US$m)

	2010	2009
Total stockholders' equity	3,448	3,278
Less: attributable to preferred shares	(590)	(590)
	2,858	2,688
Less: intangible assets	(622)	(622)
Net tangible assets	2,236	2,066

Book value per share (US$)	$8.34	$7.68
Book value per share (sterling)	£5.41	£4.74

Net tangible assets per share (US$)	$6.53	$5.90
Net tangible assets per share (sterling)	£4.24	£3.64

The growth in sterling book value per share illustrates the effect of the movement in the dollar-to-sterling exchange rate during 2010. Sterling book value per share growth is relevant when considering Catlin's market value, which is denominated in sterling. Tangible book value per share in sterling increased by 16 per cent in 2010, whilst total book value grew by 14 per cent.

Capital position

The Group's capital position is analysed in the table below:

The Group's capital base provides excellent security for policyholders, as reflected in ratings of 'A' assigned to Catlin's rated regulated entities by A.M. Best and Standard & Poor's.

Catlin's primary capital focus is to maintain an efficient level of economic capital consistent with the Group's risk appetite and current business plan. The Group believes that the capital position at 31 December 2010 is sufficient to mitigate the risk of having to raise further capital following two 1-in-100-year events, so that the Group can benefit from the improved pricing environment in subsequent years.

Capital position (US$m)

	2010	2009
Paid-up capital (net of intangibles)	2,236	2,066
Preferred shares	590	590
Capital available for underwriting	2,826	2,656

Economic capital¹	2,349	2,231
Capital buffer to economic requirements	477	425
Capital buffer as % of economic capital	20%	19%

1 Economic capital represents management's view of the capital required to operate the business, based on the Group's internal model.

Loss Reserve Development

Reserves for losses and loss expenses

Catlin adopts a conservative reserving philosophy, reflecting the inherent uncertainties in estimating insurance liabilities.

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

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

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

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

· The effects of inflation;

· Estimation of underlying exposures;

· Changes in the mix of business;

· Amendments to wordings and coverage;

· The impact of large losses;

· Movements in industry benchmarks;

· The incidence of incurred claims;

· The extent to which all claims have been reported;

· Changes in the legal environment;

· Damage awards; and

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

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

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

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

Estimate of reinsurance recoveries

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

Development of reserves for losses and loss expenses

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

The loss reserve triangles in Tables 2 and 3 show how the estimates of ultimate net losses have developed over time. The development is attributable to actual payments made and to the re-estimate of the outstanding claims, including IBNR. The development is shown including and excluding certain major events as detailed below. Development over time of net paid claims is also shown, including and excluding these major events.

All historic premium and claim amounts have been restated using exchange rates as at 31 December 2010 for the Group's functional currencies to remove the distorting effect of changing rates of exchange as far as possible.

Wellington acquisition

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

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

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

Highlights

In aggregate, across all accident years, reserves have developed slightly better than the assessments made at the previous year-end. The reserves from the 2002 and prior accident years represent 5 per cent of the Group's net reserves at 31 December 2010.

A summary of the Group's net reserves is shown in Table 1.

Table 1: Summary of Catlin Group net reserves at 31 December 2010 (US$m)

Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	% of total net reserves
2002 and prior	106	138	244	5%
2003	47	31	78	2%
2004	52	57	109	2%
2005	80	212	292	6%
2006	102	145	247	5%
2007	375	23	398	9%
2008¹	550	3	553	12%
2009¹	1,032	0	1,032	23%
2010	1,459	0	1,459	32%
Sub-total	3,804	609	4,412	98%
Other net reserves²			98	2%
Total net reserves			4,510	100%

1 Legacy Catlin net reserves after external quota share

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

Development tables

Table 2: Estimated ultimate net losses (US$m)

			Accident year
Wellington accident periods 2006 and prior		2002 and prior	2003	2004	2005	2006	2007	2008	2009	2010	Total
Net premiums earned			931	1,169	1,201	1,353	2,748	2,548	2,920	3,219

Net ultimate excluding major events
Initial estimate¹	5,946	1,545	425	546	589	633	1,396	1,531	1,788	1,639
One year later	5,918	1,564	409	481	533	593	1,462	1,516	1,764
Two years later	6,125	1,576	382	460	491	578	1,425	1,515
Three years later	5,826	1,616	381	433	469	563	1,420
Four years later	5,737	1,630	370	423	458	557
Five years later		1,639	368	428	458
Six years later		1,652	371	419
Seven years later		1,638	359
Net ultimate loss ratio excluding major events
Initial estimate¹			45.6%	46.7%	49.1%	46.8%	50.8%	60.1%	61.2%	50.9%
One year later			43.9%	41.2%	44.4%	43.8%	53.2%	59.5%	60.4%
Two years later			41.0%	39.3%	40.9%	42.7%	51.8%	59.5%
Three years later			40.9%	37.0%	39.1%	41.6%	51.7%
Four years later			39.7%	36.1%	38.1%	41.2%
Five years later			39.5%	36.6%	38.1%
Six years later			39.9%	35.8%
Seven years later			38.5%
Net ultimate major events
Initial estimate¹
One year later		20		116	334			274		282
Two years later		19		117	386			286
Three years later		19		118	397			288
Four years later		19		117	401
Five years later		20		121	401
Six years later		23		120	412
Seven years later		20		120
Net ultimate including major events
Initial estimate¹	5,946	1,565	425	661	923	633	1,396	1,804	1,788	1,921
One year later	5,918	1,583	409	599	919	593	1,462	1,802	1,764
Two years later	6,125	1,595	382	578	887	578	1,425	1,803
Three years later	5,826	1,636	381	550	870	563	1,420
Four years later	5,737	1,650	370	544	858	557
Five years later		1,662	368	548	870
Six years later		1,671	371	538
Seven years later		1,657	359
Net ultimate loss ratio including major events
Initial estimate¹			45.6%	56.6%	76.9%	46.8%	50.8%	70.8%	61.2%	59.7%
One year later			43.9%	51.2%	76.5%	43.8%	53.2%	70.7%	60.4%
Two years later			41.0%	49.4%	73.9%	42.7%	51.8%	70.8%
Three years later			40.9%	47.1%	72.4%	41.6%	51.7%
Four years later			39.7%	46.5%	71.5%	41.2%
Five years later			39.5%	46.9%	72.4%
Six years later			39.9%	46.1%
Seven years later			38.5%

Cumulative net paid	5,154	1,551	312	486	790	455	1,022	1,203	702	462	12,137
Estimated net ultimate claims	5,737	1,657	359	538	870	557	1,420	1,803	1,764	1,921	16,626
Estimated net claim reserves	583	106	47	52	80	102	398	600	1,062	1,459	4,489
External quota share								-47	-30		-77
Estimated claim reserves after external quota share	583	106	47	52	80	102	398	553	1,032	1,459	4,412
Other net reserves²											98
Booked reserves											4,510

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

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

Table 3: Net paid losses (US$m)

		Accident Year
	Wellington accident periods 2006 and prior	2002 and prior	2003	2004	2005	2006	2007	2008	2009	2010
Net premiums earned			931	1,169	1,201	1,353	2,748	2,548	2,920	3,219

Net paid excluding major events
Initial estimate¹	3,791	1,090	95	127	120	156	374	313	365	383
One year later	4,146	1,215	171	222	225	268	600	675	702
Two years later	4,845	1,307	228	281	288	357	879	952
Three years later	4,973	1,361	256	312	345	417	1,022
Four years later	5,154	1,423	282	338	374	455
Five years later		1,460	305	355	391
Six years later		1,508	301	366
Seven years later		1,532	312
Net paid loss ratio excluding major events
Initial estimate¹			10.2%	10.9%	10.0%	11.5%	13.6%	12.3%	12.5%	11.9%
One year later			18.4%	19.0%	18.8%	19.8%	21.8%	26.5%	24.0%
Two years later			24.5%	24.0%	24.0%	26.4%	32.0%	37.4%
Three years later			27.5%	26.7%	28.7%	30.8%	37.2%
Four years later			30.3%	28.9%	31.1%	33.6%
Five years later			32.8%	30.3%	32.6%
Six years later			32.3%	31.3%
Seven years later			33.5%
Net paid major events
Initial estimate¹		8		72	94			101		79
One year later		13		113	248			192
Two years later		15		116	347			251
Three years later		19		117	378
Four years later		19		119	393
Five years later		21		120	399
Six years later		20		120
Seven years later		19
Net paid including major events
Initial estimate¹	3,791	1,098	95	199	214	156	374	414	365	462
One year later	4,146	1,228	171	335	474	268	600	867	702
Two years later	4,845	1,323	228	397	635	357	879	1,203
Three years later	4,973	1,380	256	430	722	417	1,022
Four years later	5,154	1,442	282	456	767	455
Five years later		1,481	305	474	790
Six years later		1,528	301	486
Seven years later		1,551	312
Net paid loss ratio including major events
Initial estimate¹			10.2%	17.0%	17.8%	11.5%	13.6%	16.2%	12.5%	14.4%
One year later			18.4%	28.7%	39.4%	19.8%	21.8%	34.0%	24.0%
Two years later			24.5%	33.9%	52.9%	26.4%	32.0%	47.2%
Three years later			27.5%	36.7%	60.1%	30.8%	37.2%
Four years later			30.3%	39.0%	63.9%	33.6%
Five years later			32.8%	40.6%	65.8%
Six years later			32.3%	41.6%
Seven years later			33.5%

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

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

The development tables above exclude unallocated claims handling expenses, potential reinsurance failure and disputes, other reinsurance and foreign exchange adjustments, except where explicitly stated.

Major events

The following events are included in the major events sections of the development tables.

Accident year	Event
2002 & prior	World Trade Centre/US Terrorism 9/11
2004	Hurricane Charley
2004	Hurricane Frances
2004	Hurricane Ivan
2004	Hurricane Jeanne
2005	Hurricane Katrina
2005	Hurricane Rita
2005	Hurricane Wilma
2008	Hurricane Ike
2010	Chilean Earthquake
2010	Deepwater Horizon
2010	New Zealand Earthquake
2010	Central Queensland Flooding

The major event component of Wellington for accident periods prior to the business combination are not included in the major event estimates shown in the development tables.

Commentary on development tables

Accident year 2010
Excluding large losses initial selection improved on 2008/9 due to fewer large single risk losses.

Accident year 2009
Favourable development in line with historic average.

Accident year 2008
Stable development.

Accident years 2003 to 2007
Overall a small improvement since the previous year end.

Accident years 2002 and prior
Favourable development on some casualty classes.

Wellington accident periods 2006 and prior
Favourable development continued during the year across a number of classes

Limitations

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

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

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

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

Investments

Total return on Catlin's average cash and investments of US$ 7.8 billion amounted to 2.7 per cent during 2010 (2009: 5.9 per cent). Total investment income amounted to US$212 million, a 49 per cent decrease (2009: US$419 million). The decrease in the Group's 2010 pre-tax profits reflected this decrease in investment income.

Investment return decreased during 2010 as expected amid the continuation of the global low interest rate environment and the Group's conservative and liquid investment strategy. The economic recovery progressed in 2010 and risk assets generally performed well, whilst interest rates trended lower until the fourth quarter.

The quality of the portfolio continued to improve as selected risk positions were exited into rallying markets and proceeds were reinvested into the core fixed income portfolio. During 2009 the Group's investment return reflected unusual market conditions, in particular the recovery in the value of the hedge fund holdings and non-government fixed income securities whose value had decreased significantly during 2008.

Investment performance

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

Contribution to 2009-10 total investment return (US$m)

	2010	2009
Interest income	$147	$187
Net gains on fixed maturities and short-term investments	46	91
Net gains on investments in funds	19	141
Total investment return	212	419

Investment performance in 2010 is analysed by major asset category in the table below.

2010 investment performance by major asset category (US$m)

	31 Dec 2010 allocation	2010 average allocation	2010 average allocation %	Return	Return %
Fixed income	4,577	4,162	53.7%	167.5	4.0%
Cash & short-term investments	3,244	3,324	42.9%	25.2	0.8%
Funds - strategic	102	72	0.9%	11.0	15.2%
Funds - run-off	98	192	2.5%	8.1	4.2%
Total	8,021	7,750	100.0%	211.8	2.7%

The return on the fixed income portfolio reflects the unrealised gains from the decline in interest rates over the course of 2010 and the spread-tightening on corporate bonds and mortgage backed securities. The strategic hedge fund investments which are mainly focused on distressed investment strategies produced a return of 15.2 per cent during 2010.

Investment portfolio

Catlin's total cash and investments increased by 4 per cent during 2010 to more than US $8.0 billion (2009: US $7.7 billion).

The Group's investment portfolio remains liquid and conservatively positioned in the light of continued global economic uncertainty. Cash, cash equivalents and short term investments accounted for 41 per cent of the portfolio at 31 December 2010 (2009: 43 per cent), while liquid assets - defined as cash, government securities and fixed income securities with less than six months until maturity - accounted for 67 per cent of the portfolio (2009: 62 per cent).

The increase in the fixed income portfolio to 57 per cent of total cash and investments (2009: 50 per cent) reflects selective additions to the Group's core fixed income portfolio principally consisting of government/agency-backed bond holdings and high-quality corporate bond portfolios.

The Group at 31 December 2010 had US$102 million in strategically positioned fund investments, of which US$40m relates to a new investment made in 2010. The remaining US$98 million in fund investments represented investments for which redemptions were pending and where we expect to receive the majority of proceeds over the course of 2011.

The Group's asset allocation in respect of the fixed income portfolio is shown in the table below.

Detailed asset allocation at 31 December 2009 and 2010 (US$m)

	2010	2009
Fixed income investments
US government and agency securities	13%	10%
Non-US government and agency securities	13%	11%
Agency mortgage-backed securities	6%	5%
FDIC-backed corporate bonds	4%	5%
Asset-backed securities	4%	3%
Corporate bonds	15%	11%
Commercial mortgage-backed securities	2%	3%
Non-agency mortgage-backed securities	0%	2%
	57%	50%
Cash and short-term investments	41%	43%
Funds - Strategic	1%	1%
Funds - Run-off	1%	6%
Total	100%	100%

Following the recovery of mortgage-backed securities (commercial and non-agency-backed) during 2009 and through 2010, we reduced our exposure to this sector by 3 per cent during 2010. The proceeds, combined with the proceeds from hedge fund redemptions, were invested primarily in the core fixed income portfolio, principally consisting of government/agency-backed bond holdings and high-quality corporate bonds.

Asset quality

Catlin's fixed income portfolio at 31 December 2010 consisted of high-quality assets, with 97 per cent of the portfolio held in government/agency securities or instruments rated 'A' or higher (2009: 96 per cent). The quality of the Group's fixed income portfolio is analysed in the table below.

Fixed income investments by rating at 31 December 2010 (US$m) ¹

	Government/ agency	AAA	AA	A	BBB or lower	Assets
US government & agencies	23%	--	--	--	--	1,071
Non-US government & agencies	22%	--	--	--	--	1,002
Agency-mortgage-backed securities	11%	--	--	--	--	486
FDIC-backed corporate bonds	7%	--	--	--	--	343
Asset-backed securities	--	6%	*	*	--	274
Non-agency mortgage-backed securities	--	*	--	--	--	17
Commercial mortgage-backed securities	--	3%	*	*	*	159
Corporate bonds	--	2%	12%	11%	2%	1,223
Total	63%	11%	12%	11%	3%	4,575

1 Excludes US$2 million relating to interest rate options

* Less than 0.5 per cent

The Group did not have any direct sovereign exposure to the governments of Portugal, Italy, Ireland, Greece and Spain in its investment portfolio at 31 December 2010.

Duration

The duration of the fixed income portfolio at 31 December 2010 was 2.5 years (2009: 2.3 years) and largely matched with the liability benchmark. The duration of total cash and investments was 1.5 years (2009: 1.3 years) and therefore short of the liability benchmark. The duration of the portfolio was relatively short due to the decision to maintain high levels of liquidity and the expectation that interest rates will rise.

The yield to redemption on the fixed income portfolio was 1.8 per cent at 31 December 2010.

Revised investment strategy

The Group's investment portfolio at 31 December 2010 reflects the revised investment strategy that was implemented during the year. This strategy aims to maximise economic value whilst minimising downside risk to capital. The investment strategy operates within a comprehensive market risk framework that is based on capital, solvency and earnings targets. This framework is overseen by Catlin's Enterprise Risk Management team.

Under this strategy, a significant majority of Catlin's investments comprise a core portfolio, which is aligned with the profile of the Group's liabilities. A tactical portfolio is invested in credit and selected other fixed income instruments to extract premium from Catlin's high levels of liquidity and to benefit from dislocations as they may arise. Investment mandates with external managers have been updated and amended accordingly.

As part of the strategy, the Group uses overlays to manage portfolio and macro risks more efficiently. As at 31 December the Group has in place options which provide protection in the event of a significant decline in interest rates over 2011 and the first half of 2012.

Along with the definition and implementation of the revised strategy, Catlin substantially strengthened its in-house Investment organization across all functions during 2010. A new Chief Investment Officer was appointed early in the year, roles and responsibilities within the team were defined and assigned and the total Investment staff increased to 10 at year-end from three at the end of 2009.

Outlook

Catlin believes it is appropriate for the investment portfolio to remain liquid and defensively positioned during the current economic climate. This positioning will allow the Group to deploy liquidity should interest rates rise or as dislocations may occur, whilst having purchased an option to extend the duration of assets should interest rates remain low or fall further.

Aggregate Management

Catlin underwrites 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

Tables 2 and 3 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 Tables 2 and 3 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.

Table 2: Examples of catastrophe threat scenarios/Data model output (US$m) Outcomes derived as at 1 October 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)
	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000

Catlin Group
Gross loss	945	956	1,178	486	472
Reinsurance effect ¹	(607)	(653)	(696)	(245)	(244)
Modelled net loss	338	303	482	241	228

Modelled net loss as a percentage of capital available for underwriting ²	13.1%	11.8%	18.7%	9.3%	8.9%

1 Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative.

2 Capital available for underwriting amounted to US$2.6 billion at 30 June 2010; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax.

Table 3: Examples of catastrophe threat scenarios/Adjusted data model output (US$m) Outcomes derived as at 1 October 2010 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)
	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000

Catlin Group
Gross loss	1,055	1,035	1,313	554	544
Reinsurance effect¹	(618)	(664)	(711)	(313)	(281)
Modelled net loss	437	371	602	241	263

Modelled net loss as a percentage of capital available for underwriting²	17.0%	14.4%	23.4%	9.4%	10.2%

1 Reinsurance effect includes the impact of both inwards and outwards reinstatements, including any outwards reinsurance accounted for as a derivative.

Catlin Group Limited

Consolidated Balance Sheets

As at 31 December 2010 and 2009

(US dollars in millions)

	2010	2009
Assets
Investments
Fixed maturities, at fair value	$4,577	$3,867
Short-term investments, at fair value	594	796
Investments in funds, at fair value	200	530
Total investments	5,371	5,193

Cash and cash equivalents	2,650	2,500
Securities lending collateral	12	15
Accrued investment income	33	32
Premiums and other receivables	1,322	1,133
Reinsurance recoverable	1,229	1,441
Reinsurers' share of unearned premiums	276	213
Deferred policy acquisition costs	354	292
Intangible assets and goodwill	716	718
Catastrophe swaps, at fair value	-	1
Other assets	119	144
Total assets	$12,082	$11,682

Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses	$5,549	$5,392
Unearned premiums	1,886	1,724
Reinsurance payable	559	653
Accounts payable and other liabilities	298	289
Subordinated debt	93	97
Securities lending payable	12	15
Deferred tax liability (net)	237	234
Total liabilities	$8,634	$8,404

Catlin Group Limited

Consolidated Balance Sheets (continued)

As at 31 December 2010 and 2009

(US dollars in millions)

	2010	2009
Stockholders' equity
Common stock	$4	$4
Preferred stock	590	590
Additional paid-in capital	1,955	1,938
Treasury stock	(105)	(62)
Accumulated other comprehensive loss	(184)	(189)
Retained earnings	1,188	997
Total stockholders' equity	3,448	3,278
Total liabilities and stockholders' equity	$12,082	$11,682

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

Approved by the Board of Directors on 9 February 2011

Stephen Catlin

Director

Benjamin Meuli

Director

Catlin Group Limited

Consolidated Statements of Operations

For the years ended 31 December 2010 and 2009

(US dollars in millions, except per share amounts)

	2010	2009
Revenues
Gross premiums written	$4,069	$3,715
Reinsurance premiums ceded	(751)	(547)
Net premiums written	3,318	3,168
Change in net unearned premiums	(99)	(250)
Net premiums earned	3,219	2,918
Net investment return	205	414
Change in fair value of catastrophe swaps	(15)	(31)
Net gains on foreign currency	3	30
Other income	2	4
Total revenues	3,414	3,335

Expenses
Losses and loss expenses	1,852	1,681
Policy acquisition costs	684	586
Administrative and other expenses	457	449
Financing costs	15	16
Total expenses	3,008	2,732
Net income before income tax	406	603
Income tax expense	(25)	(50)
Net income	381	553
Preferred stock dividend	(44)	(44)
Net income to common stockholders	$337	$509

Earnings per common share
Basic	$0.98	$1.52
Diluted	$0.93	$1.47

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

Catlin Group Limited

Consolidated Statements of Changes in Stockholders' Equity

For the years ended 31 December 2010 and 2009

(US dollars in millions)

	Common stock	Preferred stock	Additional paid-in capital	Treasury stock	Accumulated other comprehensive loss	Retained earnings	Total stockholders' equity
Balance 1 January 2009	$3	$590	$1,624	$(55)	$(301)	$608	$2,469
Comprehensive income:
Net income to common stockholders	-	-	-	-	-	509	509
Other comprehensive income	-	-	-	-	112	-	112
Total comprehensive income	-	-	-	-	112	509	621
Rights Issue	1	-	288	-	-	-	289
Stock compensation expense	-	-	22	-	-	-	22
Stock options exercised	-	-	(1)	1	-	-	-
Dividends	-	-	-	-	-	(115)	(115)
Deferred compensation obligation	-	-	5	-	-	(5)	-
Treasury stock purchased	-	-	-	(8)	-	-	(8)
Balance 31 December 2009	$4	$590	$1,938	$(62)	$(189)	$997	$3,278

Comprehensive income:
Net income to common stockholders	-	-	-	-	-	337	337
Other comprehensive income	-	-	-	-	5	-	5
Total comprehensive income	-	-	-	-	5	337	342
Stock compensation expense	-	-	23	-	-	-	23
Dividends	-	-	-	-	-	(138)	(138)
Deferred compensation obligation	-	-	8	-	-	(8)	-
Treasury stock purchased	-	-	-	(57)	-	-	(57)
Distribution of treasury stock held in Employee Benefit Trust	-	-	(14)	14	-	-	-
Balance 31 December 2010	$4	$590	$1,955	$(105)	$(184)	$1,188	$3,448

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

Catlin Group Limited

Consolidated Statements of Cash Flows

For the years ended 31 December 2010 and 2009

(US dollars in millions)

	2010	2009
Cash flows provided by operating activities
Net income	$381	$553
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	16	17
Amortisation of net discounts of fixed maturities	26	(10)
Net gains on investments	(65)	(232)
Cessation of Syndicate 2020	-	112
Changes in operating assets and liabilities
Reserves for losses and loss expenses	224	36
Unearned premiums	155	147
Premiums and other receivables	(206)	(15)
Deferred policy acquisition costs	(65)	(36)
Reinsurance payable	(83)	159
Reinsurance recoverable	179	28
Reinsurers' share of unearned premiums	(56)	103
Accounts payable and other liabilities	10	10
Deferred taxes	(9)	27
Other	102	(23)
Net cash flows provided by operating activities	609	876

Cash flows used in investing activities
Purchases of fixed maturities	(2,939)	(2,163)
Proceeds from sales of fixed maturities	2,051	1,291
Proceeds from maturities of fixed maturities	184	117
Net purchases, sales and maturities of short-term investments	195	(722)
Purchases of investment in funds	(44)	(17)
Redemptions of investments in funds	392	547
Net purchases and sales of property and equipment	(32)	(10)
Net cash flows used in investing activities	(193)	(957)

Catlin Group Limited

Consolidated Statements of Cash Flows (continued)

For the years ended 31 December 2010 and 2009

(US dollars in millions)

	2010	2009
Cash flows provided by financing activities
Net proceeds from Rights Issue	-	289
Dividends paid on common stock	(138)	(115)
Dividends paid on preferred stock	(44)	(44)
Purchase of treasury stock	(57)	(8)
Net cash flows (used in)/provided by financing activities	(239)	122
Net increase in cash and cash equivalents	177	41
Effect of exchange rate changes	(27)	104
Cash and cash equivalents - beginning of year	2,500	2,355
Cash and cash equivalents - end of year	$2,650	$2,500

Supplemental cash flow information
Taxes (received)/paid	$(19)	$6
Interest paid	$3	$5

Cash and cash equivalents comprise the following:
Cash at bank and in hand	$2,215	$2,023
Cash equivalents	$435	$477

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

Catlin Group Limited

Notes to the Consolidated Financial Statements

For the years ended 31 December 2010 and 2009

1 Nature of operations

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

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

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

2 Significant accounting policies

Basis of presentation

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

Principles of consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company transactions and balances are eliminated on consolidation.

Reporting currency

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

Fixed maturities and short-term investments

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

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

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

Investments in funds

The Group's investments in funds are carried at fair value. The fair value is based on either the net asset value provided by the funds' administrators or, where available, the quoted market price of the funds. All gains or losses on investments in funds are included within net investment return in the Consolidated Statements of Operations.

Derivatives

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

The fair values of the catastrophe swap agreements described in Note 8 are determined by management using internal models based on the valuation of the underlying notes issued by the counterparty. The determination of the fair values takes into account changes in the market for catastrophic reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date.

The fair values of option contracts, equity index futures contracts and interest rate options described in Note 8 are based on prices provided by independent pricing services. Any open option and equity index futures contracts at the balance sheet date are included in investments in funds in the Consolidated Balance Sheets. Any open interest rate option contracts are included in fixed maturity investments. Gains and losses resulting from change in fair value are included in net investment return in the Consolidated Statements of Operations.

The fair values of foreign exchange derivatives described in Note 8 are based on prices provided by counterparties. Gains and losses on foreign exchange derivatives are included in net gains/(losses) on foreign currency in the Consolidated Statements of Operations.

Cash and cash equivalents

Cash equivalents are carried at cost, which approximates fair value, and include all investments with original maturities of 90 days or less.

Securities lending

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

Premiums

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

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

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

Policy acquisition costs

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

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

Reserves for losses and loss expenses

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

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

Reinsurance

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

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

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

Intangible assets and goodwill

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

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

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

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

The impairment tests involve an assessment of the fair values of reporting units and intangible assets. The measurement of fair values is based on an evaluation of a number of factors, including ranges of future discounted earnings and recent market transactions. Certain key assumptions considered include forecasted trends in operating returns and cost of capital.

Other assets

Other assets include prepaid items, property and equipment, income tax recoverable and unsettled trade receivables.

Comprehensive income/(loss)

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

Foreign currency translation and transactions

Foreign currency translation

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

Foreign currency transactions

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

Income taxes

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

Stock compensation

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

Warrants

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

Pensions

The Group operates defined contribution pension schemes for eligible employees, the costs of which are expensed as incurred.

The Group also sponsors a defined benefit pension scheme which was closed to new members in 1993. Any surplus or deficit on the scheme is carried as an asset or liability on the balance sheet.

New accounting pronouncements

In October 2010 the Financial Accounting Standards Board ('FASB') issued new accounting guidance specifying how costs associated with acquiring or renewing insurance contracts should be identified and capitalised. This guidance is effective for periods beginning after 15 December 2011. Earlier adoption is permitted. Retrospective application is also permitted but not required. Catlin is evaluating the impact this new guidance will have on the Group's financial position and results of operations.

In 2010, the Group adopted amendments to accounting guidance, none of which had a material impact on the Group's financial position or results of operations on the following topics: consolidations; fair value measurements and disclosures; and disclosures about the credit quality of financing receivables.

3 Segmental information

From 2010 the focus of management's review of results is by underwriting hubs, whereas in previous years it was by risk-bearing legal entities. As a result, Catlin has modified its basis of segmental reporting from 2010. 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 underwritten 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 represented 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	●		●

At 31 December 2010 there were four significant intra-Group reinsurance contracts in place: a 45 per cent Quota Share, which cedes Catlin Syndicate risk to Catlin Bermuda; a 75 per cent Quota Share contract which cedes Catlin UK risk to Catlin Bermuda; a Whole Account Stop Loss contract which cedes 5 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 87.5 per cent from Catlin Syndicate to Catlin Bermuda; and also a 75 per cent Quota Share contract which cedes Catlin US risk to Catlin Bermuda. The effects of each of these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

Net underwriting contribution by underwriting hub for the year ended 31 December 2010 is as follows:

(US dollars in millions)	London/UK	Bermuda	US	International	Total
Gross premiums written	$2,323	$502	$707	$537	$4,069

Net premiums earned	1,827	427	538	427	3,219
Losses and loss expenses	(1,052)	(177)	(349)	(274)	(1,852)
Policy acquisition costs	(409)	(99)	(94)	(82)	(684)
Net underwriting contribution	$366	$151	$95	$71	$683

Net underwriting contribution by underwriting hub for the year ended 31 December 2009 is as follows:

(US dollars in millions)	London/UK	Bermuda	US	International	Total
Gross premiums written	$2,347	$421	$581	$366	$3,715

Net premiums earned	1,891	348	409	270	2,918
Losses and loss expenses	(1,103)	(150)	(232)	(196)	(1,681)
Policy acquisition costs	(391)	(75)	(72)	(48)	(586)
Net underwriting contribution	$397	$123	$105	$26	$651

Net underwriting contribution is the primary measure used by management for review and decision making. Assets are reviewed in total by management for purposes of decision making. The Group does not allocate assets to the reporting segments.

4 Investments

Fixed maturities

The fair values of fixed maturities at 31 December 2010 and 2009 are as follows:

	2010	2009
(US dollars in millions)	Fair value	Fair value
US government and agencies	$1,071	$745
Non-US governments	1,002	836
Corporate securities	1,566	1,243
Asset-backed securities	274	260
Mortgage-backed securities	662	783
Interest rate options	2	-
Total fixed maturities	$4,577	$3,867

$477 million (2009: $409 million) of the total mortgage-backed securities at 31 December 2010 is represented by investments in Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Bank and Federal Home Loan Mortgage Corporation bonds.

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

		2010		2009
(US dollars in millions)	Fair value	%	Fair value	%
US government and agencies	$1,071	23	$745	19
Non-US governments	1,002	22	836	22
AAA	1,329	29	1,254	32
AA	550	12	262	7
A	503	11	600	16
BBB and other	122	3	170	4
Total fixed maturities	$4,577	100	$3,867	100

Fixed maturities at 31 December 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)	Fair value
Due in one year or less	$564
Due after one through five years	2,561
Due after five years through ten years	438
Due after ten years	78
	3,641
Asset-backed securities	274
Mortgage-backed securities	662
Total	$4,577

The Group did not have an aggregate investment with a single counterparty, other than the US government, in excess of 10 per cent of total investments at 31 December 2010 and 2009.

Investments in funds

Investments in funds by category at 31 December 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Hedge funds	$200	$358
Funds of funds	-	121
Bond fund	-	47
Equity market option contracts	-	4
Total investments in funds	$200	$530

Hedge funds are a portfolio comprising of 14 individual hedge funds, 11 of which are in the process of being redeemed. The timing of the redemptions is governed by the terms of the agreements which vary from 30 days' notice and monthly redemptions to 65 days' notice and 25 per cent of funds being redeemable each quarter.

Funds of funds were two funds invested across a diversified set of managers, strategies and underlying asset classes. The bond fund was a portfolio of government and corporate bonds with an objective to outperform the OECD bond benchmark over a two-year period. The funds of funds and the bond fund were redeemed in July 2010.

There are unfunded commitments related to investment in funds of $25 million as at 31 December 2010.

Net investment return

The components of net investment return for the years ended 31 December 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Interest income	$147	$187
Net gains on fixed maturities and short-term investments	46	91
Net gains on investments in funds	19	141
Total investment return	212	419
Investment expenses	(7)	(5)
Net investment return	$205	$414

The Group has elected to apply the fair value option to its fixed maturities and short-term investments. In 2010 net gains of $46 million (2009: $91 million) were included in the Consolidated Statements of Operations in relation to changes in the fair values of these assets.

Gains in 2010 on fixed maturities and short-term investments still held at 31 December 2010 were $33 million (2009: $91 million). Gains in 2010 on investments in funds still held at 31 December 2010 were $15 million (2009: $87 million).

Restricted assets

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

The total value of these restricted assets by category at 31 December 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Fixed maturities	$2,275	$2,134
Short-term investments	503	41
Cash and cash equivalents	656	567
Total restricted assets	$3,434	$2,742

Securities lending

The Group participates in a securities lending programme under which certain of its fixed maturity investments are loaned to third parties through a lending agent. Collateral in the form of cash, government securities and letters of credit is required at a minimum rate of 102 per cent of the market value of the loaned securities and is monitored and maintained by the lending agent. The Group had $12 million (2009: $15 million) of securities on loan at 31 December 2010.

5. Fair value measurement

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

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

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

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

Assets and liabilities utilising Level 2 inputs include: US agency securities; non-US government obligations, corporate and municipal bonds, residential mortgage-backed securities ('RMBS'), commercial mortgage-backed securities ('CMBS') and asset-backed securities ('ABS') to the extent that they are not identified as Level 3 items; over-the-counter ('OTC') derivatives (e.g. foreign exchange contracts); 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 assumptions about 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 measured at fair value on a recurring basis

The table below shows the values at 31 December 2010 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

(US dollars in millions)	Balance as at 31 December 2010	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
US government and agencies	$1,071	$745	$326	$-
Non-US governments	1,002	-	1,002	-
Corporate securities	1,566	-	1,566	-
RMBS	503	-	501	2
CMBS	159	-	159	-
ABS	271	-	268	3
CDO	3	-	-	3
Interest rate options	2	-	2	-
Total fixed maturities	4,577	745	3,824	8
Short-term investments	594	501	93	-
Investments in funds	200	-	40	160
Total assets at fair value	$5,371	$1,246	$3,957	$168

In 2010 the Company reclassified US Treasuries to Level 1 securities as it determined that the level of trading activity for all US Treasuries is high and that quoted prices are readily and regularly available for these securities.

The table below shows the values at 31 December 2009 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.

(US dollars in millions)	Balance as at 31 December 2009	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
US government and agencies	$745	$-	$745	$-
Non-US governments	836	-	836	-
Corporate securities	1,243	-	1,243	-
RMBS	580	-	514	66
CMBS	203	-	203	-
ABS	256	-	252	4
CDO	4	-	-	4
Total fixed maturities	3,867	-	3,793	74
Short-term investments	796	-	796	-
Investments in funds (excluding options)	526	-	169	357
Equity market option contracts	4	4	-	-
Catastrophe swaps	1	-	-	1
Total assets at fair value	$5,194	$4	$4,758	$432

In 2009, there were no significant transfers between Level 1 and Level 2 of the fair value hierarchy.

The changes in the year ended 31 December 2010 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

(US dollars in millions)	Total	RMBS	ABS	CDO	Investments in funds	Catastrophe swaps
Balance, 1 January 2010	$432	$66	$4	$4	$357	$1
Total net gains/(losses) included in income	27	6	1	1	20	(1)
Net (disposals)/purchases	(290)	(70)	(2)	(2)	(216)	-
Level 3 transfers in	-	-	-	-	-	-
Foreign exchange	(1)	-	-	-	(1)	-
Balance, 31 December 2010	$168	$2	$3	$3	$160	$-

Amount of gains relating to balances still held at year end	$17	$2	$-	$-	$15	$-

The changes in the year ended 31 December 2009 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

(US dollars in millions)	Total	RMBS	ABS	CDO	Investments in funds	Catastrophe swaps
Balance, 1 January 2009	$378	$31	$3	$3	$334	$7
Total net gains/(losses) included in income	100	9	-	(3)	100	(6)
Net (disposals)/purchases	(87)	(8)	(2)	-	(77)	-
Level 3 transfers in	41	34	3	4	-	-
Balance, 31 December 2009	$432	$66	$4	$4	$357	$1

Amount of gains/(losses) relating to balances still held at year end	$86	$8	$1	$(4)	$87	$(6)

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 were 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 option contracts are based on prices provided by independent pricing services. The fair values of foreign exchange derivatives are based on prices provided by counterparties.

Subordinated debt: Subordinated debt is not carried at fair value but at amortised cost. At 31 December 2010, the fair value of the subordinated debt was $68 million which compared to a carrying value of $93 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, which 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.

6 Reserves for losses and loss expenses

The Group establishes reserves for losses and loss expenses, which are estimates of future payments of reported and unreported losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves is complex and imprecise, requiring the use of informed estimates and judgments. The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable, and would be reflected in earnings in the period in which the estimates are changed. Management believes that they have made a reasonable estimate of the level of reserves at 31 December 2010 and 2009.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 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 year	1,996	1,775
Prior years	(144)	(94)
Total net incurred losses and loss expenses	1,852	1,681
Net paid losses and loss expenses for claims related to:
Current year	(461)	(232)
Prior years	(1,050)	(1,305)
Total net paid losses and loss expenses	(1,511)	(1,537)
Foreign exchange and other	(51)	109
Loss portfolio transfer	-	431
Net unpaid losses and loss expenses, end of year	4,510	4,220
Reinsurance recoverable on unpaid losses and loss expenses	1,039	1,172
Gross unpaid losses and loss expenses, end of year	$5,549	$5,392

As a result of the changes in estimates of insured events in prior years, the 2010 reserves for losses and loss expenses net of reinsurance recoveries decreased by $144 million (2009: $94 million). The decrease in reserves relating to prior years was due to reductions in expected ultimate loss costs and reductions in uncertainty surrounding the quantification of the net cost claim events.

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, Catlin's wholly owned Syndicate ('Syndicate 2003') 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.

7 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
(US dollars in millions)	Premiums written	Premiums earned	Losses incurred	Premiums written	Premiums earned	Losses incurred
Direct	$2,712	$2,653	$1,538	$2,586	$2,473	$1,614
Assumed	1,357	1,261	580	1,129	1,094	403
Ceded	(751)	(695)	(266)	(547)	(649)	(336)
Net premiums	$3,318	$3,219	$1,852	$3,168	$2,918	$1,681

The Group's reinsurance recoverable as at 31 December 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Gross reinsurance recoverable	$1,288	$1,489
Provision for uncollectible balances	(59)	(48)
Net reinsurance recoverable	$1,229	$1,441

The Group evaluates the financial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All current reinsurers have financial strength rating of at least 'A' from Standard and Poor's or 'A-' from A.M. Best at the time of placement, or provide appropriate collateral. However, certain reinsurers from prior years have experienced a reduced ratings which has led to the need for the provision. At 31 December 2010 there were two reinsurers which accounted for 5 per cent or more of the total reinsurance recoverable balance.

	% of reinsurance recoverable	Best rating
Munich Re	17%	A+
Hannover Ruck-AG	5%	A

8 Derivative financial instruments

Catastrophe swap agreement

On 17 December 2007 Catlin Bermuda entered into a contract that provided 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') was a special purpose vehicle, Newton Re. Newton Re issued to investors $225 million in three-year floating rate notes, divided into Class A and Class B notes. The proceeds of those notes provided the collateral for Newton Re's potential obligations to Catlin Bermuda under the cat swap. The cat swap expired in 2010 without being triggered.

The cat swap was measured in the balance sheet at fair value with any changes in the fair value included in the Consolidated Statements of Operations. As at 31 December 2009, the fair value of the cat swaps was $1 million. As there is no liquid market for this derivative, the fair value is derived from indicative prices for the notes issued by the cat swap counterparties. No cat swaps were held at 31 December 2010.

Options and futures 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 including equity risk and interest rate risk.

Equity risk

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

Equity market put option contracts provide the option purchaser with the right but not the obligation to sell a financial instrument at a predetermined exercise price during a defined period. Options contracts are marked to market on a daily basis.

Gains and losses on equity market options and futures contracts are included in net investment return together with related gains on investments in funds in the Consolidated Statements of Operations. Equity market put option contracts' fair value is included in investment in funds of the Consolidated Balance Sheet. No equity futures contracts were held at 31 December 2010 or 2009.

Interest rate risk

The investment portfolio is predominantly invested in cash and fixed income securities and so is exposed to interest rate risk. Interest rate option contracts are entered into to manage the market risk associated with holding cash and fixed income securities.

Gains and losses on interest rate options are included in net investment return together with related gains on fixed maturities in the Consolidated Statements of Operations. Interest rate options' fair value is included in fixed maturities on the Consolidated Balance Sheet.

Foreign exchange contracts

During the year, the Group held various foreign currency derivatives (forward contracts) to manage currency risk. Gains and losses on foreign exchange contracts are included in net gains on foreign currency in the Consolidated Statements of Operations. There were no foreign exchange derivatives held at 31 December 2010 or 2009.

Impact of derivatives

The fair values of derivatives at 31 December 2010 and 2009 are as follows:

		2010		2009
(US dollars in millions)	Assets	Liabilities	Assets	Liabilities
Equity market option contracts	$-	$-	$4	$-
Interest rate options	2	-	-	-
Catastrophe swaps	-	-	1	-
Total derivatives	$2	$-	$5	$-

The notional values of exchange traded and OTC open derivatives at 31 December 2010 and 2009 are as follows:

	Notional value
(US dollars in millions)	2010	2009
Equity market option contracts	$-	$115
Interest rate options	$850	$-

The net losses on derivatives at 31 December 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Equity market options contracts	$(4)	$(6)
Equity market futures contracts	-	(7)
Interest rate options	(6)	-
	(10)	(13)
Foreign exchange contracts	(8)	4
Catastrophe swaps	(15)	(31)
Net losses on derivatives	$(33)	$(40)

The derivatives contracts held by Group at 31 December 2010 contain no credit risk-related contingent features.

9 Subordinated debt

The Group's outstanding subordinated debt as at 31 December 2010 and 2009 consisted of the following:

(US dollars millions)	2010	2009
Variable rate, face amount €7, due 15 March 2035	$9	$11
Variable rate, face amount $27, due 15 March 2036	27	28
Variable rate, face amount $31, due 15 September 2036	32	32
Variable rate, face amount $10, due 15 September 2036	10	10
Variable rate, face amount €11, due 15 September 2036	15	16
Total subordinated debt	$93	$97

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

On 20 July 2006 Catlin Underwriting issued $31 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 on 15 September 2011.

10 Intangible assets and goodwill

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

Net intangible assets and goodwill as at 31 December 2010 and 2009 consist of the following:

(US dollars in millions)	Goodwill	Indefinite life intangibles	Finite life intangibles	Total
Net value at 1 January 2009	$70	$575	$6	$651
Movements during 2009:
Foreign exchange revaluation	7	62		69
Amortisation charge	-	-	(2)	(2)
Total movements during 2009	7	62	(2)	67
Net value at 31 December 2009	77	637	4	718
Movements during 2010:
Foreign exchange revaluation	(3)	-	-	(3)
Acquisition of Angel	3	-	-	3
Amortisation charge	-	-	(2)	(2)
Total movements during 2010	-	-	(2)	(2)
Net value at 31 December 2010	$77	$637	$2	$716

Goodwill, syndicate capacity and admitted licenses are considered to have an indefinite life and as such are tested annually for impairment as at 30 September. Neither goodwill nor intangibles were considered impaired in 2010 or 2009.

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

Syndicate capacity is tested annually for impairment by comparing management's estimate of its fair value to the amount at which it is carried in the Group's consolidated balance sheet.

The fair value of the Group's syndicate capacity is assessed by reference to market activity where relevant and internally developed cash flow models. In 2010 and 2009, management determined that the fair value of syndicate capacity exceeded its carrying value.

Distribution channels and surplus lines authorisations are considered to have a finite life and are amortised over their estimated useful lives of five years. As at 31 December 2010 the gross carrying amount of finite life intangibles was $10 million (2009: $10 million) and accumulated amortisation was $8 million (2009: $6 million). Amortisation of intangible assets at current exchange rates will amount to approximately $2 million in 2011 and nil thereafter.

Of the total amount of intangible assets and goodwill at 31 December 2009 of $718 million, $634 million (88 per cent) 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. This reflects that the majority of business written in the Syndicate is in US dollars. The value of syndicate capacity was fixed at $634 million at the date of remeasurement.

11 Taxation

Bermuda

Under current Bermuda law neither the Company nor its Bermuda subsidiaries are required to pay any taxes in Bermuda on their income or capital gains. Both the Company and its Bermuda subsidiaries have received undertakings from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, they will be exempt from taxation in Bermuda until March 2016.

United Kingdom

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

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

United States

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

Other international income taxes

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

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

The income tax expense for the years ended 31 December 2010 and 2009 is as follows:

(US dollars in millions)	2010	2009
Current tax expense/(benefit)	$12	$(31)
Deferred tax expense	13	81
Expense for income taxes	$25	$50

The effective tax rate for the Group is 6.3 per cent (2009: 8.3 per cent). A reconciliation of the difference between the expense for income taxes and the expected tax expense at the weighted average tax rate for the years ended 31 December 2010 and 2009 is provided below. The weighted average expected tax expense has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

(US dollars in millions)	2010	2009
Expected tax expense at weighted average rate	$15	$33
Permanent differences:
Disallowed expenses	4	14
Valuation allowances	7	3
Prior year adjustments including changes in uncertain tax positions	5	-
Impact of tax rate change in the UK	(6)	-
Expense for income taxes	$25	$50

The components of the Group's net deferred tax liability as at 31 December 2010 and 2009 are as follows:

(US dollars in millions)	2010	2009
Deferred tax assets:
Net operating loss carry forwards	$346	$378
Stock options	5	-
Accelerated capital allowances	10	5
Syndicate capacity amortisation and other	(15)	3
Valuation allowance	(30)	(23)
Total deferred tax assets	$316	$363
Deferred tax liabilities:
Untaxed profits	(459)	(502)
Intangible assets arising on business combination	(94)	(95)
Total deferred tax liabilities	$(553)	$(597)
Net deferred tax liability	$(237)	$(234)

As at 31 December 2010 the Group has net operating loss carry forwards of $1,152 million (2009: $1,268 million) which are available to offset future taxable income. The net operating loss carry forwards primarily arise in UK subsidiaries and relate to accelerated tax deductions for member-level reinsurance premiums. These are taxed on a declarations basis and are therefore only timing items. There are no time restrictions on the use of these losses, and they are expected to be fully utilised. Certain reclassifications have been made to the basis of presenting components of deferred tax. There is no impact on net deferred tax liability, and prior year comparatives have been represented accordingly.

As at 31 December 2010 there are potential deferred tax assets of $30 million (2009: $23 million) in US companies relating to prior year losses, but a 100 per cent valuation allowance has been recognised in respect of the losses in both 2010 and 2009.

Uncertain tax positions

As at 31 December 2010 the amount of uncertain tax benefits was $13 million (2009:$4 million). All unrecognised tax benefits would affect the effective tax rate if recognised.

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

(US dollars in millions)	2010	2009
Unrecognised tax benefits balance at 1 January	$4	$8
Gross increases/(decreases) for tax positions of prior years	9	(4)
Unrecognised tax benefits balance at 31 December	$13	$4

The Group does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts. The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements. The Group did not pay or accrue any interest or penalties in 2010 or 2009 relating to uncertain tax positions.

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

Major tax jurisdiction	Years
United Kingdom	2009-2010
United States	2007-2010

12 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2010 and 2009:

	2010	2009
Common stock, par value $0.01
Authorised	500,000,000	500,000,000

Issued	359,118,666	358,895,225
Stock held by Employee Benefit Trust	(16,467,609)	(8,772,686)
Outstanding	342,651,057	350,122,539

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
Rights Issue	-	102,068,050
Exercise of stock options and warrants	223,441	1,664,249
Balance, 31 December	359,118,666	358,895,225

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. 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 shares to be issued under the PSP (assuming full vesting) is paid into an Employee Benefit Trust ('EBT'). The EBT uses these funds to purchase Group common stock in the open market. This stock will ultimately be distributed to PSP holders to the extent that the PSP awards vest. The Group has also purchased shares 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 10,391,694 of the Group's stock at an average of $5.48 (£3.56) per unit. The total amount paid for treasury stock of $57 million was deducted from stockholders' equity. The cumulative cost of shares purchased through the EBT of $105 million is shown as a deduction to the 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 of $4.37. During 2009 warrants increased by 874,829 in relation to the Rights Issue. No warrants were exercised in the year, leaving 6,912,715 warrants outstanding at 31 December 2010.

Dividends

Dividends on common stock

On 26 March 2010 the Group paid a final dividend on the common stock relating to 2009 financial year of 16.8 pence per share (26.2 cents per share) to stockholders of record at the close of business on 26 February 2010. The total dividend paid for the 2009 financial year was 25 pence per share (40 cents per share).

On 24 September 2010, the Group paid an interim dividend relating to the 2010 financial year of 8.6 pence per share (13.7 cents per share) to stockholders of record on 27 August 2010.

Dividends on preferred stock

On both 19 January and 19 July 2010, the Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

13 Employee stock compensation schemes

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

The total amount expensed to income in respect of all plans in the year ended 31 December 2010 was $23 million (2009: $22 million) included in administrative and other expenses. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions.

Performance Share Plan

On 11 February 2010 a total of 6,423,925 options with $nil exercise price and 2,491,158 non-vested shares (total of 8,915,083 securities) were awarded to Group employees under the PSP. In August to December 2010 a further 228,335 options with $nil exercise price and 21,023 non-vested shares (total of 249,358 securities) were awarded, resulting in a total of 9,164,441 securities granted to Group employees under the PSP in 2010. Up to half of the securities will vest in 2013 and up to half will vest in 2014, subject to certain performance conditions.

These securities have been treated as non-vested shares and as such have been measured at their fair value on the grant date as if they were fully vested and issued and assuming an annual attrition rate amongst participating employees of 4 per cent for grants made in 2010, 6 per cent for grants made in 2009, 7 per cent for grants made in 2008 and 7 per cent for grants made in 2007. This initial valuation is revised at each balance sheet date to take account of actual achievement of the performance condition that governs the level of vesting and any changes that may be required to the attrition assumption. The difference is charged or credited to the Statement of Operations, with a corresponding adjustment to equity. As a result of the Rights Issue, the number of awards was adjusted in 2009. The total number of shares in respect of which PSP securities were outstanding at 31 December 2010 was 22,393,627 (2009: 16,886,199), and the total amount of expense relating to PSP for the year ended 31 December 2010 was $23 million (2009: $22 million).

The weighted average grant date fair value of the options awarded in 2010 is $5.39 (2009: $5.18) and the total fair value of shares vested during the year is $11 million (2009: $9 million).

The table below shows the PSP securities as at 31 December 2010:

	Outstanding	Non-vested	Vested
Beginning of year	16,886,199	16,392,156	494,043
Granted during year	9,164,441	9,164,441	-
Vested during year	(677,070)	(2,638,487)	1,961,417
Forfeited during year	(838,183)	(838,183)	-
Exercised during year	(2,141,760)	-	(2,141,760)
End of year	22,393,627	22,079,927	313,700
Exercisable, end of year	313,700	-	313,700

The weighted average remaining contractual life of the options is 8 years. The maximum contractual term of the equity share options outstanding is 9 years. The weighted average fair value of non-vested shares outstanding at the year end is $5.70.

The weighted average fair value of the 1,961,417 shares vested in the year is $5.41, and the weighted average fair value of the 838,183 shares forfeited in the year is $5.44.

The total compensation to be expensed in future periods relating to unvested awards outstanding at the year end is $50 million. The weighted average period of recognition of these shares is 2.4 years.

In addition, at each dividend payment date during 2010 an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting), was paid into the EBT. This amount, totalling $8 million in 2010 (2009: $5 million), is taken directly to retained earnings and capitalised in stockholders' equity within additional paid-in capital.

Long Term Incentive Plan

Options over a total of 16,791,592 ordinary common shares were granted to eligible employees in 2004 and prior years. The LTIP options were fully exercisable and expensed by 31 December 2007. There was no compensation expense in relation to the LTIP for the years ended 31 December 2010 and 2009. All options will expire by 4 July 2012. As at 31 December 2010 there were 4,568,169 (2009: 5,024,187) options outstanding with an exercise price of $4.37 and 78,097 (2009: 204,334) options outstanding with an exercise price of £3.06. As a result of the Rights Issue, the number of options and the exercise price were adjusted in 2009.

14 Earnings per share

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

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

(i) PSP;

(ii) LTIP;

(iii) Warrants; and

(iv) Employee Share Plans.

Income to common stockholders is arrived at after deducting preferred share dividends of $44 million (2009: $44 million).

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

	2010	2009
Weighted average number of shares	344,634,882	333,739,594
Dilution effect of warrants	1,353,902	1,047,080
Dilution effect of stock options and non-vested shares	16,856,689	10,889,601
Weighted average number of shares on a diluted basis	362,845,473	345,676,275

Earnings per common share
Basic	$0.98	$1.52
Diluted	$0.93	$1.47

In 2010 and 2009 securities awarded under the PSP were included in the computation of diluted earnings per share to the extent that the performance conditions necessary for these securities to vest were met as at 31 December 2010 and 2009.

As described in Note 12, 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 2009.

15 Other comprehensive income (loss)

The following table details the individual components of other comprehensive loss for 2010 and 2009:

2010 (US dollars in millions)	Amount before tax	Tax benefit/ (expense)	Amount after tax
Defined benefit pension plan	$1	$-	$1
Cumulative translation adjustments	15	(11)	4
Other comprehensive income	$16	$(11)	$5

2009 (US dollars in millions)	Amount before tax	Tax benefit/ (expense)	Amount after tax
Defined benefit pension plan	$-	$-	$-
Cumulative translation adjustments	112	-	112
Other comprehensive income	$112	$-	$112

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

(US dollars in millions)	2010	2009
Cumulative translation adjustments	$(185)	$(189)
Funded status of defined benefit pension plan adjustment	1	-
Accumulated other comprehensive loss	$(184)	$(189)

16 Pension commitments

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

In the UK the Group operates defined contribution schemes for certain directors and employees, which are administered by third-party insurance companies. The pension cost for the UK scheme was $10 million for the year ended 31 December 2010 (2009: $9 million).

In Bermuda the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2010 (2009: $2 million).

In the US the Group has adopted a 401(k) Profit Sharing Plan qualified under the Internal Revenue Code and a Non-Qualified Deferred Compensation Plan under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the US scheme was $8 million for the year ended 31 December 2010 (2009: $5 million).

In connection with the acquisition of Wellington in December 2006, the Group assumed liabilities associated with a defined benefit pension scheme which Wellington sponsored. The scheme has been closed to new members since 1993. The current membership consists only of pensioners and deferred members. Projected benefit obligations at 31 December 2010 were $25 million (2009: $27 million) and fair value of plan assets was $27 million (2009: $28 million). The pension costs for the defined benefit scheme were insignificant for the years ended 31 December 2010 and 2009.

Pension costs for pension schemes in other countries of operation are considered insignificant.

17 Statutory financial data

The statutory capital and surplus of each of the Group's principal operating subsidiaries is in excess of regulatory requirements of $1,081 million (2009: $995 million). The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,331 million (2009: $1,222 million).

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

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

18 Commitments and contingencies

Legal proceedings

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

Concentrations of credit risk

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

The cash balances and investment portfolio are managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single institution issue and issuers. Similar principles are followed for the purchase of reinsurance. The Group believes that there are no significant concentrations of credit risk associated with its investments or its reinsurers. Note 7 describes concentrations of more than 5 per cent of the Group's total reinsurance recoverable asset.

Letters of credit

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

As at 31 December 2010, the Group has access to the following letter of credit facilities:

· A three-year $650 million unsecured multi-bank facility available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2010 $223 million letters of credit were issued under this facility. The facility has an expiry date of 31 December 2013.

· A bilateral facility available for utilisation by Catlin Bermuda collateralised by pledged financial assets. As at 31 December 2010 $116 million letters of credit were issued under this facility.

· A facility managed by Lloyd's, acting for the Syndicates. As at 31 December 2010 $7 million letters of credit were issued under this facility.

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

Future lease commitments

The Group leases office space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2010 are as follows:

(US dollars in millions)
2011	$23
2012	17
2013	21
2014	22
2015 and thereafter	112
Total	$195

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $9 million (2009: $11 million).

19 Related parties

The Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2010 and 2009 was insignificant to the Group Financial Statements.

The Group purchases services from 4C Associates Ltd. In 2009, 4C Associates was controlled by a party related to a member of management of the Group. The cost of the services purchased from 4C Associates Ltd in 2009 was insignificant to the Group Financial Statements.

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

20 Subsequent events

Proposed dividend

On 9 February 2011 the Board approved a proposed final dividend of 17.9 pence per share (28.8 cents per share), payable on 18 March 2011 to stockholders of record at the close of business on 18 February 2011. The final dividend is payable in sterling.

Preferred share dividend

The Board of Catlin Bermuda approved a dividend of $22 million to the shareholders of the non-cumulative perpetual preference shares. This dividend was paid on 19 January 2011.

Management has evaluated subsequent events until 9 February 2011, the date of issuance of the financial statements.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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