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RNS Number : 9889G

Catlin Group Limited

11 February 2010

CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS

FOR YEAR ENDED 31 DECEMBER 2009

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 2009.

Financial Highlights

· Record profit before tax of US$603 million (2008: -US$13 million)

· 33% return on net tangible assets (2008: -3%)

· 24% return on equity (2008: -2%)

· 27% increase in net tangible assets per share to US$5.90 (2008: US$4.63); 15% increase in sterling net tangible assets per share(1)

· 8% increase in annual dividend to 25 pence (40.0 US cents) per share (2008: 23.2 pence; 37.9 US cents) (1)

· 12% increase in gross premiums written to US$3.7 billion on constant currency basis; 8% increase on a reported basis (2008: US$3.4 billion)

· 17% increase in net premiums earned to US$2.9 billion on constant currency basis; 12% increase on a reported basis (2008: US$2.6 billion)

· 89% combined ratio (2008: 95%)

· 5.9% investment return for period (2008: -1.4%)

· 8.3% effective tax rate

Operational Highlights

· Non-London underwriting hubs produced 37% of gross premiums written, 39% of total underwriting contribution

· 6% increase in average weighted premium rates across all classes during 2009

· Loss ratio decreased to 58% (2008: 63%); attritional loss ratio stable

· 35% increase in gross premiums written in January 2010 by non-London underwriting hubs (on constant currency basis)

· Average weighted premium rates increased by 1% across portfolio during January 2010 renewals

· Claims service rated best in London market by independent survey

(1) Prior period per share amounts adjusted for the impact of the 2 for 5 Rights Issue completed in March 2009

US$m		2009	2008
Gross premiums written		3,715	3,437
Net premiums written		3,168	2,611
Net premiums earned		2,918	2,596
Net underwriting contribution(1)		651	454
Total investment return		419	(85)
Net income/(loss) before income taxes		603	(13)
Net income/(loss) to common stockholders		509	(47)
Earnings per share (US dollars) (2)		1.52	(0.16)
Total dividend per share (pence)(2)		25.0	23.2
Total dividend per share (US cents)(2)		40.0	37.9
Loss ratio(3)		57.6%	62.9%
Expense ratio(3)		31.5%	32.0%
Combined ratio(3)		89.1%	94.9%
Investment return		5.9%	(1.4%)
Return on net tangible assets(4)		33.2%	(2.8%)
Return on equity(4)		24.3%	(1.9%)
	31 Dec 2009	31 Dec 2008	% change
Total assets	11,682	9,659	21%
Investments and cash	7,693	5,933	30%
Stockholders' equity	3,278	2,469	33%
Unearned premiums	1,724	1,536	12%
Book value per share (US dollars)(2,5)	$7.68	$6.61	16%
Book value per share (sterling)(2,5)	£4.74	£4.53	5%
Net tangible book value per share (US dollars)(2,5)	$5.90	$4.63	27%
Net tangible book value per share (sterling)(2,5)	£3.64	£3.17	15%

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

(2) Prior period per share amounts adjusted for the impact of the 2 for 5 Rights Issue completed in March 2009.

(3) The expense ratio and the combined ratio include policy acquisition costs and most administrative expenses. These ratios now exclude profit-related bonuses, share option scheme costs and certain other Group corporate costs; these costs had previously been included in these ratios.

(4) Returns on net tangible assets and equity exclude preferred shares and are calculated by reference to opening balances (adjusted for capital issued during the year).

(5) Book value and net tangible book value per share exclude preferred shares and treasury shares.

Note: A table of rebased ratios and per-share amounts is included in the attachments at the end of the Financial Review.

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

"I am pleased to report that Catlin has produced excellent financial results for 2009, including record profits, a 33 per cent return on net tangible assets and a 24 per cent return on equity. Net tangible assets per share increased by 27 per cent and book value per share increased by 16 per cent.

"As Catlin celebrates its 25^th anniversary, I believe that the Group is in a strong position to provide further value for its shareholders."

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

"Twenty-five years after establishing the Group and ten years after we set up our first office outside London, Catlin has achieved a major milestone: Our non-London underwriting hubs in 2009 produced nearly 40 per cent of our underwriting contribution. We expect the value of our global distribution system to increase in terms of both premium volume and underwriting profitability.

"I look forward to the Group's continuing success as Catlin enters its second 25 years. The current market environment is good, with attractive pricing levels for most business classes, although the investment environment remains challenging. Absent extreme events, we foresee steady increases in our underwriting performance as our international underwriting hubs continue to mature."

- ends -

For more information contact:

Media Relations:

James Burcke,

Head of Communications, London

Tel:

Mobile:

E-mail:

+44 (0)20 7458 5710

+44 (0)7958 767 738

james.burcke@catlin.com

Liz Morley, Maitland

Tel:

E-mail:

+44 (0)20 7379 5151

emorley@maitland.co.uk

Investor Relations:

William Spurgin,

Head of Investor Relations, London

Tel:

Mobile:

E-mail:

+44 (0)20 7458 5726

+44 (0)7710 314 365

william.spurgin@catlin.com

Notes to editors:

1. Catlin Group Limited, headquartered in Bermuda, is an international specialist property/casualty insurer and reinsurer 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 2009 - balance sheet: £1 = US$1.62 (2008: £1 = US$1.46); income statement (average rate): £1 = US$1.56 (2008: £1 = US$1.85).

5. Earnings per share are based on weighted average shares in issue of 334 million during 2009. Book value per share is based on 350 million shares in issue at 31 December 2009. Both calculations exclude Treasury Shares held in trust. Prior period amounts have been adjusted for the impact of the Rights Issue concluded in March 2009.

6. Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2009 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment information.

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. More information regarding the Survey is available at www.catlinarcticsurvey.com.

Chairman's Statement

I am pleased to report Catlin's excellent financial results for 2009. Profits before tax were US$603 million, compared with a loss of US$13 million in 2008, and net income available to common shareholders was US$509 million. Return on net tangible assets was 33 per cent, and return on equity was 24 per cent.

Shareholder value increased substantially. Net tangible asset value per share rose to US$5.90, a 27 per cent increase (2008: US$4.63), whilst book value per share rose by 16 per cent to US$7.68 (2008: US$6.61). The Board of Directors has declared an increased full-year dividend for the fifth consecutive year.

Aided by a benign year for catastrophe losses, our underwriting team produced a record net underwriting contribution of US$651 million, an increase of 43 per cent. The Group's total investment return amounted to US$419 million, reflecting a total return of 5.9 per cent on our average invested assets.

The Group benefitted from good underwriting conditions during 2009 as average weighted premium rates increased by 6 per cent across our portfolio of business. Whilst market conditions do not appear to be as strong in 2010, we believe there are still good opportunities for profitable underwriting. We believe that our investment in distribution, especially in our underwriting hubs outside London, differentiates Catlin from its peers and places Catlin in a strong position to take advantage of these opportunities.

Rights Issue and dividend

In March 2009 the Group announced the completion of a fully underwritten 2-for-5 Rights Issue. The Rights Issue raised US$289 million in new capital, which has been deployed to support profitable underwriting.

The Board of Directors has declared a final dividend of 16.8 pence per share (26.2 US cents), payable on 26 March 2010 to shareholders of record at the close of business on 26 February 2010. Including the interim 2009 dividend of 8.2 pence (13.8 US cents), the total 2009 dividend of 25.0 pence (40.0 US cents) represents an 8 per cent increase over the 2008 dividend as restated for the impact of the Rights Issue.

The increased dividend demonstrates the Board's confidence in the Group's prospects and underscores our commitment to providing an attractive return to our shareholders.

Board of Directors

There were several changes to the Board of Directors during 2009. Benjamin Meuli was appointed to the Board in June 2009 and succeeded Christopher Stooke as the Group's Chief Financial Officer in September. I would like on behalf of the Board to pay tribute to Chris Stooke for his hard work and leadership during his six years as Chief Financial Officer. Benji Meuli was formerly Chief Investment Officer at Swiss Re and a Managing Director at Morgan Stanley and JP Morgan, and he brings a broad range of investment and financial experience to Catlin.

Robert Gowdy and Guy Beringer were appointed as Non-Executive Directors during 2009. Bob Gowdy was formerly president and chief executive officer of CGU Insurance Group in the United States and held executive positions at other US insurers, while Guy Beringer had been the Senior Partner of Allen & Overy, the international law firm. They succeeded Michael Eisenson and Michael Hepher, who retired from the Board in June 2009 and January 2010, respectively. Mike Eisenson joined the Board in 2002, whilst Michael Hepher joined in 2003. I would like to thank both Mike and Michael for their many contributions over the years as Directors and, in Michael's case, as Chairman of the Audit Committee. Nicholas Lyons, who joined the Catlin Board during 2008, succeeded Michael Hepher as Chairman of the Audit Committee.

Conclusion

Catlin's success during 2009 is largely the result of strong leadership by Stephen Catlin and his management team and the hard work of all of Catlin's employees. I express my thanks to Stephen, the management team and all Catlin employees for their efforts.

One of Catlin's overriding goals over the past 25 years has been to build a business that will grow and stand the test of time. As we celebrate the Group's 25^th anniversary, I believe that Catlin has succeeded in this aim and is well-positioned to provide increased value for its shareholders in the future.

Sir Graham Hearne

Chairman

Chief Executive's Review

2009 was arguably Catlin's most successful year since the Group was established a quarter of a century ago. The Group produced record profits, as well as record levels of underwriting contribution and investment return.

These results are truly encouraging, especially following the Group's operating loss in 2008 which was largely driven by the impact of the economic crisis and a high level of catastrophe losses. The trends that lie beneath the results are even more positive. Our underwriting hubs outside our traditional London base have continued to grow and are contributing nearly 40 per cent of underwriting profits. The attritional loss ratio has remained stable. The expense ratio has decreased. The balance sheet has further strengthened.

Underwriting performance

Catlin produced strong underwriting results during the past year. Average weighted premium rates increased by 6 per cent across the Group's portfolio, with 10 per cent average weighted increases for catastrophe-exposed classes. Whilst catastrophe losses were benign during 2009, there were numerous events that gave rise to large single-risk losses, which did reduce our underwriting profits.

Gross premiums written rose by 12 per cent on a constant currency basis to US$3.7 billion (2008: US$3.4 billion); when exchange movements are included, the increase was 8 per cent. Volumes underwritten in London were flat on a constant currency basis; the gross premiums written by the Bermuda, US, Asia-Pacific, European and Canadian underwriting hubs increased significantly.

Net premiums earned rose by 17 per cent on a constant currency basis to US$2.9 billion (2008: US$2.6 billion). The growth in net premiums earned resulted from not only increased volumes, but also the embedded growth still being produced by Catlin's acquisition of Wellington Underwriting plc in 2006.

Underwriting contribution - a metric by which Catlin assesses underwriting profitability - increased to a record US$651 million, a 43 per cent increase (2008: US$454 million). The loss ratio decreased to 57.6 per cent from 62.9 per cent, while the attritional loss ratio - a measure that excludes catastrophe and large single risk losses - decreased to 53.7 per cent (2008: 54.0 per cent). Large single-risk losses accounted for 7.1 percentage points of the loss ratio (2008: 3.1 percentage points), which was at the higher end of our expectations. Approximately half of the large single-risk losses were credit insurance claims arising from the economic crisis that were reported in the first half of the year. We do not expect significant further claims from this source. Without the credit losses, large single-risk loss experience in 2009 would have been in line with the 2008 experience.

Reserve releases during 2009 amounted to US$94 million, an amount equal to 2 per cent of opening loss reserves (2008: US$118 million; 3 per cent).

The expense ratio - which includes policy acquisition costs and most operating expenses but excludes performance-related pay and some Group overheads - decreased to 31.5 per cent as the Group continued to place tight controls on expenditures (2008: 32.0 per cent). Overall, the Group's combined ratio decreased nearly 6 percentage points to 89.1 per cent (2008: 94.9%).

The rapid recovery in financial markets during 2009 has resulted in the return of much of the capital lost by the property/casualty industry in 2008. Some new players entered the market as the year progressed. Despite increased capacity, the marketplace has maintained discipline, with pricing across our risk portfolio broadly flat during the January 2010 renewal season. Underwriting conditions currently remain favourable for most of the business classes that Catlin writes, although pricing for longer-tail casualty lines is less attractive. Catlin is reacting by retrenching in these business classes until adequate margins return.

Full commentary on Catlin's underwriting performance during 2009 is found in the Underwriting Review.

Underwriting hubs

For its first 15 years, Catlin operated from one office in London. In 1999 we began to broaden our underwriting horizons, establishing small offices in Singapore, Kuala Lumpur, Houston and New Orleans. We believed that significant opportunities existed for Catlin outside the London wholesale market, and we began building relationships with brokers and assureds whose business was underwritten locally. Writing business outside London also increases the diversity of our portfolio, both by geography and by product mix.

Today, Catlin operates 47 offices in 20 countries worldwide, staffed overwhelmingly by local professionals. As a result of our international growth, we now organise our business by underwriting hub:

· London, which includes London wholesale business and our UK regional business;

· Bermuda, which includes business written by Catlin Bermuda;

· US, which includes business written by Catlin's US offices on behalf of our US-domiciled insurers, the Catlin Syndicate and Catlin UK;

· Asia-Pacific, which is headquartered in Singapore and includes offices in China, Malaysia, Australia, Japan and India;

· Europe, which is headquartered in Cologne and includes offices in France, Germany, Belgium, Italy, Spain, Switzerland, Austria and Norway, as well as two Latin American representative offices; and

· Canada, which is headquartered in Toronto and includes an office in Calgary.

Our underwriting hubs outside of London are now producing meaningful results. During 2009, the non-London hubs accounted for 37 per cent of total gross premiums written and produced 39 per cent of the Group's underwriting contribution.

We expect the value of our global distribution system to increase during a soft market as locally produced business tends to be more resilient to competitive pressures than London wholesale business. Our underwriting hubs constitute a significant competitive advantage for Catlin.

Investments

The recovery in global investment markets during 2009 had a positive impact on Catlin's investment performance. The Group's total return on average investments increased to a record 5.9 per cent (2008: -1.4 per cent). Total investment income amounted to US$419 million (2008: -US$85 million).

Catlin recognises that this excellent performance was the result of unusual market conditions. The Group continues to maintain a defensive investment strategy, and we recognise that this performance is not likely to be repeated in 2010.

Catlin's total cash and investments increased by 30 per cent during 2009 to US$7.7 billion (2008: US$5.9 billion). A portion of this increase was the result of the US$289 million Rights Issue concluded in March 2009 and the reinsurance to close of Wellington Syndicate 2020 into the Catlin Syndicate. The positive investment performance and cash flow from the Group's operations also contributed to the increase.

Balance sheet/capital adequacy

The Group's balance sheet further strengthened during 2009. Total assets rose by 21 per cent to US$11.7 billion (2008: US$9.7 billion), whilst cash and investments rose by 30 per cent to US$7.7 billion (2008: US$5.9 billion). Stockholders' equity amounted to US$3.3 billion on 31 December 2009, a 33 per cent increase (2008: US$2.5 billion).

The Group's Rights Issue, concluded in March 2009, raised US$289 million in new capital, which was deployed immediately to write additional amounts of catastrophe business at the favourable rates prevailing during 2009. The Group aims to maintain a level of capital that exceeds its current requirements by 10 to 20 per cent, both to provide a comfortable margin and to have the ability to respond quickly to underwriting opportunities. An analysis of the Group's capital position is provided in the Financial Review.

Financial strength ratings

In December Standard & Poor's increased the financial strength rating that it assigns to our underwriting subsidiaries to 'A' from 'A-'. In announcing its decision, Standard & Poor's noted "the improved financial profile of the Group" as well as "Catlin's strong competitive position, strong operating performance, strong capitalisation and strong enterprise risk management."

A.M. Best, the other major insurance rating agency, also has assigned 'A' financial strength ratings to Catlin's underwriting units.

Enterprise Risk Management

Catlin during 2009 launched an Enterprise Risk Management ('ERM') initiative, resourced by a dedicated team drawn from the Group's existing Risk, Actuarial and Finance staffs. The objective of ERM is to integrate the Group's existing risk management programmes into an increasingly holistic and embedded risk and capital management framework. This strengthened framework is designed to lead to more informed strategic and operational decisions and enhanced capital efficiency.

The benefits that Catlin expects to achieve from ERM include:

· an improved understanding of all risks and related capital requirements;

· better decision making and enhanced profits through the use of sophisticated capital modelling and portfolio modelling techniques to improve the assessment of capital requirements and the allocation of capital; and

· stronger internal and external risk management communication.

Standard & Poor's has rated Catlin's ERM initiative as 'Strong', ranking Catlin amongst the top quartile of insurers whose ERM programmes are rated.

Catlin Arctic Survey

Catlin is the title sponsor of the Catlin Arctic Survey, an endeavour whose purpose is to produce scientifically valid data regarding the impact of climate change and other changes to our environment.

During 2009 an expedition led by polar explorer Pen Hadow gathered data on the thickness of the Arctic Sea ice that was subsequently used by University of Cambridge researchers to more accurately predict how quickly that ice is melting. In 2010 the Catlin Arctic Survey includes a similar data-gathering expedition as well as an Arctic 'ice camp' where scientists can gather research data on ocean acidification and other pertinent issues.

Our sponsorship of the Catlin Arctic Survey not only has produced new, important scientific data, but has also effectively raised awareness of the Catlin brand worldwide.

Conclusion

The Group's success in 2009 is the result of the hard work and commitment of our employees. I am extremely pleased with our employees' performance during the past year.

Catlin has closed the first 25 years of its history on a high note. Since the company's initial public offering in 2004, we have met our target of producing a return on equity that exceeds the risk-free rate by 10 percentage points over an underwriting cycle. Since 2004 Catlin's weighted annual return on equity has averaged 14.6 per cent whilst return on net tangible assets has averaged 19.4 per cent, compared with an average 2.8 per cent return on 6-month US Treasury bills. Over the same period, our annual dividend has increased by 131 per cent in sterling.

Looking ahead, I see increasing opportunity for Catlin. The current market environment is good, with attractive pricing levels for most business classes, although the investment environment remains challenging. Much of the premiums written at increased rates during 2009 will not actually earn to profits until 2010. Our decade of investment in our non-London hubs paid off in 2009 as these hubs made a significant contribution for the first time to our overall results. Absent extreme events, we foresee steady increases in our underwriting performance as these hubs continue to mature.

I look forward to continuing success as Catlin enters its second 25 years.

Stephen Catlin

Chief Executive

Key performance indicators

Catlin has established a set of 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.

Book value per share plus dividends (US$)

	Book value per share	Dividends per share paid during year	Book value per share plus dividends
2009	$7.68	0.37	$8.05
2008	$6.61	0.44	$7.05
2007	$8.38	0.43	$8.81
2006(1)	$7.05	0.25	$7.30
2005	$5.22	0.22	$5.44

Management believes that increase in book value per share plus the dividend paid to shareholders during a calendar year is an appropriate measure of shareholder value creation. During 2009 shareholder value, as measured on this basis, increased by 22 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.

Tangible book value per share plus dividends (US$)

	Tangible book value per share	Dividends per share paid during year	Tangible book value per share plus dividends
2009	$5.90	0.37	$6.27
2008	$4.63	0.44	$5.07
2007	$5.73	0.43	$6.16
2006(1)	$4.46	0.25	$4.71
2005	$4.86	0.22	$5.08

Creation of shareholder value is also measured by the increase in tangible book value per share plus the dividend paid to shareholders during a calendar 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 2009 shareholder value, as measured on this basis, increased by 35 per cent.

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

	Return on equity	Return on net tangible assets
2009	24.3%	33.2%
2008	(1.9%)	(2.8%)
2007	22.9%	36.1%
2006(1)	26.2%	29.4%
2005	2.0%	2.2%

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 far exceeded this target on an annual basis in three of the past five years. Employees' profit-related bonuses are determined as an increasing percentage of income before tax as return on equity exceeds a minimum amount, subject to a cap.

Income before income tax (US$m)

	Income before tax
2009	603
2008	(13)
2007	543
2006(1)	521
2005	28

Catlin aims to increase its profits over time. Pre-tax profitability is an effective measurement of the combination of underwriting performance, expense control and investment return. During 2009 Catlin's pre-tax profits reached an all-time high, exceeding the previous record by 11 per cent. Pre-tax profits in 2008 were negatively impacted by investment volatility and claims arising from Hurricane Ike. As described earlier, pre-tax profits form the basis for profit-related bonus calculations.

Net premiums earned (US$m)

		Net premiums earned
2009		2,918
2008		2,596
2007		2,490
2006(1)		2,228
2005		1,216

The Group considers net premiums earned as a relevant indicator of underwriting volume during an accounting period. Net premiums earned increased during 2009 by 12 per cent, or 17 per cent on a constant currency basis. The growth in net premiums earned during 2009 reflects both organic growth as well as the embedded growth supplied by the acquisition of Wellington Underwriting plc.

Loss ratio (%)

	Attritional loss ratio	Loss ratio
2009	53.7%	57.6%
2008	54.0%	62.9%
2007	51.0%	46.4%
2006(1)	48.7%	50.0%
2005	48.5%	71.1%

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is a measure of underwriting performance. The decrease in the loss ratio in 2009 was the result of the benign level of catastrophe losses. The attritional loss ratio - which excludes catastrophe and large single-risk losses and is a measure of longer-term, sustainable underwriting profitability - improved slightly during 2009.

Expense ratio (%)

	Expense ratio
2009	31.5%
2008	32.0%
2007	34.1%
2006(1)	32.6%
2005	30.9%

The expense ratio measures the Group's acquisition costs and operating expenses as a percentage of net premiums earned. Net premiums earned during 2009 grew at a faster rate than expenses, as the volumes underwritten by the non-London underwriting hubs increased. Catlin's expense ratio excludes performance-related pay and certain Group expenses.

Total investment return (%)

	Total Investment return
2009	5.9%
2008	(1.4%)
2007	4.6%
2006(1)	4.3%
2005	2.4%

Total investment return measures investment income plus realised and unrealised gains and losses in the asset portfolio. The Group's strong investment return of 5.9 per cent during 2009 resulted from the recovery in value of the Group's diversified asset holdings as well as from narrowing spreads on fixed income investments. This was in contrast to the previous year, when investment performance was adversely affected by unprecedented volatility in global investment markets.

Employee turnover (%)

	Employee turnover
2009	10.4%
2008	14.0%
2007	19.7%
2006	12.9%
2005	10.6%

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 10.4 per cent in 2009 was the lowest in five years and marks a return to the traditionally low turnover rates at Catlin prior to the Wellington acquisition at the end of 2006.

Claims performance (%)

	Highly recommended
2009	31%
2007	25%
2005	17%

Catlin's claims handling performance is measured by a bi-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 was the top-ranked insurer in 2009 with 31 per cent of brokers highly recommending Catlin's claims service. Catlin also ranked first in a 2007 study and ranked fourth in 2005.

(1 ) Catlin and Wellington combined

Note: Pre-2009 book value and dividend amounts have been adjusted for the effect of the Rights Issue

Underwriting Review

Underwriting philosophy

Catlin's underwriting strategy is built on the three fundamental pillars of profitable underwriting:

· access to specialty niche business;

· accurate pricing; and

· portfolio management.

The six underwriting hubs that Catlin has established over the past decade give the Group the ability to access geographically diverse business in local markets as well as to select the most appropriate mix of risks at the correct price. This access to business has enabled Catlin to increase premium volume and, more importantly, underwriting profitability. The Group during the past year increased its underwriting contribution by 43 per cent to US$651 million (2008: US$454 million), with nearly 40 per cent of underwriting contribution produced by the non-London underwriting hubs.

Our global, multi-hub approach gives the Group increased flexibility to meet the changing needs of our assureds and their brokers. It also allows Catlin to respond quickly to changes in market conditions. For example, Catlin was able to quickly allocate increased capacity across the Group in response to the favourable market conditions for Property Reinsurance that were created during 2009.

Catlin aspires to be the best technically in the marketplace, in terms of not only underwriting but also claims management and actuarial support. A key Catlin advantage is the use of consistent underwriting models and dedicated actuarial support across underwriting teams. A leading actuarial firm reported during 2009: "Catlin is towards the more sophisticated end of what we see elsewhere in the market in terms of technical pricing and rate monitoring processes. Catlin's processes have been in place for several years and have been improved and refined over time. Catlin is significantly ahead of the majority of others that we see in the market."

Whilst Catlin operations are diverse geographically, our underwriting ethos and technical approach is consistent throughout our 47 offices.

Catlin continually aims to improve and ensure that underwriters have all the support needed to accurately assess and price risk.

2009 catastrophe loss experience

2009 will be remembered as a good year for the property/casualty industry, due to the absence of major catastrophe losses at a time when pricing levels for many business classes were at, or near, record highs. 2009 also stands out in comparison with 2008, a year in which insurers incurred both large catastrophe losses and significant investment losses.

In recent years, the majority of catastrophe losses have been produced by Atlantic hurricanes. During 2009 water temperatures in the North Atlantic were warmer than the recent average, producing ideal conditions for tropical storm formation and forecasters predicted an above-average number of storms. However, only nine named storms formed during the 2009 hurricane season, with only three reaching hurricane strength. This activity was well below the seasonal averages of 14.3 named storms and 7.5 hurricanes since the mid-1990s.

2004-2009 Atlantic hurricane seasons

Source: Holborn Corporation

Commentators believe that the below average hurricane experience during 2009 was partly due to the mitigating effect of El Niño, an oceanic and atmospheric phenomenon that causes unusually warm water temperatures in the Pacific near Ecuador. El Niño, which occurs every three to seven years, has a significant impact on atmospheric wind speeds which, in turn, is believed to prevent Atlantic storm formation. No more than two hurricanes have ever made US landfall during an El Niño year.

However, some experts believe that irrespective of the effect of El Niño, Atlantic hurricane exposures will continue to increase over the long term as a result of climate change.

Largely due to the benign Atlantic hurricane season, the level of catastrophe losses worldwide was much lower than in 2008, according to Swiss Re.

Worldwide catastrophe losses 1980-2009

US$m	Natural hazards	Man-made events
1980	2.0	1.0
1981	2.0	1.0
1982	3.0	1.5
1983	5.0	1.5
1984	3.5	1.5
1985	5.0	3.0
1986	2.0	4.0
1987	7.0	5.0
1988	4.0	7.0
1989	13.5	11.5
1990	21.0	7.0
1991	19.5	5.0
1992	37.0	6.0
1993	12.0	6.0
1994	7.0	25.0
1995	19.0	5.0
1996	12.0	6.0
1997	8.0	7.0
1998	20.0	6.0
1999	31.0	10.0
2000	10.0	4.0
2001	12.0	30.0
2002	14.5	3.0
2003	17.0	3.0
2004	30.0	8.0
2005	105.0	8.0
2006	11.0	6.0
2007	21.0	3.0
2008	41.0	8.0
2009	21.0	3.0

Source: Based on Swiss Re/sigma data

However, other natural hazards during 2009 led to substantial claims for insurers and reinsurers. Munich Re reports there were 850 destructive natural hazard events worldwide in 2009, significantly in excess of the ten-year average of 770. Such events produced approximately US$54 billion of economic losses and US$20 billion of insured losses, according to Aon Benfield.

Largest insured natural hazard events in 2009

Date	Event	Location	Estimated fatalities	Estimated structure claims	Estimated economic loss (US$m)	Estimated insured loss (US$m)
24-25 January	Windstorm Klaus	France, Spain, Italy	26	715,000	$6,000	$3,300
23-24 July	Severe weather	Switzerland, Austria	11	5,000	2,500	1,250
10-13 February	Severe weather	Oklahoma, Texas, Ohio Valley (US)	13	300,000	2,400	1,200
9-11 April	Severe weather	Great Plains, Midwest, Southeast (US)	2	190,000	2,200	1,100
9-18 June	Severe weather	Rockies, Great Plains, Midwest, Mid-Atlantic (US)	1	200,000	2,000	1,000
7-20 February	Bushfires	Victoria, New South Wales (Australia)	173	10,040+	1,000	990
25-29 March	Severe weather	Great Plains, Southeast, Midwest, Northeast (US)	6	150,000	1,600	830
20-21 July	Severe weather	Rockies, Great Plains (US)	1	85,000	1,400	700
26-30 September	Typhoon Ketsana	Philippines, Vietnam	645	7,400,000	1,030	260
4 June	Earthquake	Italy	308	15,000	2,500	250
All other events					35,370	9,120
Total					$58,000	$20,000

Source: Aon Benfield

Rate movements

Average weighted premium rates across Catlin's risk portfolio increased by 6 per cent during 2009 (2008: 4 per cent decrease), marginally less than the 7.5 per cent anticipated at the start of the year.

Rate movements for Catlin's overall book of business and for catastrophe and non-catastrophe business classes since 1999 are shown in the table below.

Rating indexes for catastrophe and non-catastrophe business classes 1999-2009

	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
Catastrophe classes	100%	107%	135%	194%	213%	207%	206%	257%	251%	231%	254%
Non-catastrophe classes	100%	103%	136%	175%	200%	208%	205%	200%	190%	188%	193%
All classes	100%	105%	135%	182%	204%	206%	204%	218%	209%	201%	212%

The 10 per cent average weighted increase for catastrophe classes of business was predominantly driven by 2008 loss experience. The 2008 Atlantic hurricane season was the fourth most severe on record - in terms of both number of storms and number of major hurricanes - since the onset of reliable data. Hurricane Ike in September 2008 was the third-most costly hurricane on record in terms of insured damage.

Rates for non-catastrophe classes continued to strengthen through 2009, and averaged 3 per cent for the year (see table below). The average increase was partly driven by favourable pricing for certain D&O/Professional/Financial casualty classes and improved pricing in other classes.

Rate movements for non-catastrophe business classes 2008-2009

	2009	2008
January	2%	-3%
February	10%	0%
March	4%	-5%
April	2%	-3%
May	3%	-1%
June	3%	0%
July	3%	-4%
August	5%	-1%
September	4%	3%
October	3%	-1%
November	5%	1%
December	5%	7%

The table below shows rate movements for classes of business within Catlin's six product groups - Aerospace, Casualty, Energy/Marine, Property, Reinsurance and Specialty/War & Political Risks - since 1999.

Rating indexes for product groups 1999-2009

	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
Aerospace	100%	107%	116%	135%	134%	135%	131%	122%	109%	108%	114%
Casualty	100%	101%	137%	170%	222%	235%	227%	215%	204%	197%	203%
Energy/Marine	100%	107%	135%	187%	221%	223%	228%	253%	244%	229%	248%
Property	100%	107%	137%	189%	204%	199%	195%	221%	207%	192%	198%
Reinsurance	100%	105%	123%	169%	187%	190%	192%	230%	231%	219%	238%
Specialty/War & Political Risk	100%	104%	146%	211%	222%	218%	212%	209%	202%	206%	209%

The table below shows average weighted premium rate movements by product group in 2008 and 2009.

Average weighted premium rate movements by product group 2008-2009

	2009	2008
Aerospace	6%	-1%
Casualty	3%	-3%
Energy/Marine	8%	-6%
Property	3%	-7%
Reinsurance	9%	-5%
Specialty/ War & Political Risk	1%	2%

After years of depressed pricing, 2009 saw significant hardening in the Airline insurance market, with rates rising an average of 15 percent. This was driven by a number of single-risk losses, but was also in response to a general deterioration in underlying margins since 2002.

The Group's Political Risk and Credit portfolios were inevitably impacted by the global financial crisis, with premium volumes reducing due to a combination of the market's reassessment of underlying risk and reduced deal flows. Catlin continues to write this business on a selective and disciplined basis at reduced volumes but with much improved pricing and tighter conditions.

2009 gross premiums written

Gross premiums written increased by 12 per cent to US$3.7 billion on a constant currency basis. Unadjusted for exchange rate movements, gross premiums written rose by 8 per cent (2008: US$3.4 billion).

The table below illustrates gross written premiums by underwriting hub.

Gross premiums written by underwriting hub 2006-2009 (US$m)

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

Gross premiums written by the non-London hubs - Bermuda, US, Asia-Pacific, Europe and Canada - rose by 37 per cent, reflecting the investment made by the Group in the development of these hubs.

The increase in volume in the Bermuda hub reflects the strong pricing conditions for Property Reinsurance, which is by far the largest class of business written in Bermuda. The volume increases in the US, Asia-Pacific, Europe and Canada reflect the continuing development of these hubs. In each case, volumes increased because of an expansion of the classes of business underwritten by the hub and the addition of new underwriting teams.

The gross premiums written by the three International hubs - Asia-Pacific, Europe and Canada - is shown in the table below. Gross premiums written by these hubs have increased by nearly 400 per cent from 2006 through 2009.

Gross premiums written by international underwriting hubs 2006-2009 (US$m)

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

2009 underwriting contribution

Underwriting contribution increased by 43 per cent to a record $651 million (2008: US$454 million), despite the adverse effect on loss ratio arising from increased large single-risk losses.

Large single-risk losses accounted for 7.1% of the 2009 reported loss ratio. Approximately 50 per cent of this amount comprised claims resulting from the economic crisis which impacted the Group's credit insurance portfolio. Substantially all of these claims were reported and reserved in the first half of 2009.

Loss ratio development 2007-2009

	2009	2008	2007
Attritional loss ratio	53.7%	54.0%	51.0%
Catastrophe losses	--	10.4%	--
Large single-risk losses	7.1%	3.1%	1.0%
Release of reserves	(3.2%)	(4.6%)	(5.6%)
Reported loss ratio	57.6%	62.9%	46.4%

The remaining large single-risk losses were produced by a variety of events, including:

· The June crash of Air France Flight 447 en route from Rio de Janeiro to Paris. The tragedy, which killed 228 passengers and crew, was the worst airline accident in French aviation history and caused the highest number of fatalities since the crash of American Airlines Flight 587 in 2001.

· The series of bushfires that raged in February in the Australian state of Victoria. These bushfires, which included as many as 400 individual fires on one day alone, resulted in the deaths of 173 people and total insured losses approaching US$1 billion.

· The June explosion of a train carrying gas tanks in the Italian town of Viareggio, which killed 32 people.

The attritional loss ratio - which excludes catastrophe and large single-risk losses - improved to 53.7% (2008: 54.0%). This was a good performance, especially as much of the premiums which earned to profits in 2009 related to business written during 2008, when rates were on average 6 per cent lower across the portfolio than in 2009. The Group therefore is optimistic that good underwriting profitability should continue in 2010 - absent extreme events - as much of the premium that will earn in 2010 was written during 2009 at more attractive rates.

The underwriting contribution and loss ratios produced by the underwriting hubs are shown in the table below.

2009 underwriting contribution and loss ratios by underwriting hub

US$m	London	Bermuda	US	International	Group
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%

The majority of the Group's 2009 underwriting contribution - 61 per cent - was produced by the London underwriting hub, which includes the London wholesale business as well as regional UK business.

Lloyd's is the world's largest specialty insurance market. Our leadership position at Lloyd's - the Catlin Syndicate remains the largest syndicate at Lloyd's in terms of premium volume and are leaders in most classes - allows the Group to write an increasingly diversified book of business. During 2008 and 2009, as worries about the creditworthiness of insurers and reinsurers increased, brokers and their clients increasingly favoured syndicated risk placements, whereby more than one insurer or reinsurer underwrites a policy. This development favoured Catlin, as Lloyd's is the world's largest market for syndicated risk placement.

The proportion of underwriting contribution produced by the Group's other underwriting hubs is expected to increase over time as the operations further mature. During 2009, the hubs accounted for 37 per cent of gross premiums written and 39 per cent of underwriting contribution.

The Bermuda underwriting hub, which primarily writes Property Reinsurance, produced a strong underwriting contribution due to the lack of catastrophe losses during 2009. This performance was augmented by the further development of other business classes, leading to a more balanced portfolio.

The US hub also performed well as premium volumes and underwriting contribution grew. This was due to the introduction of additional niche classes of business, written by new, experienced underwriting teams with strong existing client bases and following markets, as well as an increase in business written in existing classes as teams gain further traction. In April 2009 Catlin US established a new specialty in general aviation business, underwritten by a managing agent, which had a significant impact on gross premiums written.

The underwriting contribution from the three International hubs - Asia-Pacific, Europe and Canada - was reduced by large single risks losses, most notably the Air France and satellite losses which amounted to approximately US$36 million. One of the advantages provided by our hub structure is that individual hubs, despite their smaller volumes of business, can provide on a local basis the full line capacity that Catlin can offer in the London market. This allows Catlin to offer flexibility to clients relating to their access to the Group, but can also lead to more volatile underwriting results at the hub level. If these large single-risk losses are excluded, the international hub's underwriting contribution would have been US$62 million.

Product groups

The Group writes numerous classes of insurance and reinsurance, which are divided into six product groups. The gross premium written by each product group, divided by major business categories, are shown in the table below.

Gross written premiums by product group 2008-2009 (US$m)

Aerospace Product Group

	2009	2008
Aviation	416	318
Satellite	74	80
Total	490	398

Casualty Product Group

	2009	2008
General Casualty	332	333
Professional/Financial	350	244
Marine	96	91
Motor	19	9
Total	797	677

Energy/Marine Product Group

	2009	2008
Upstream Energy	194	243
Hull	136	132
Cargo	91	71
Specie	74	74
Downstream Energy	51	48
Marine Liability	31	45
Total	577	613

Property Product Group

	2009	2008
International	189	198
US	96	98
Binding Authorities	93	91
Total	378	387

Reinsurance Product Group

	2009	2008
Non Proportional Property	611	538
Proportional Property	178	156
Marine	137	97
Casualty	132	128
Specialty	12	12
Total	1,070	931

Specialty/War & Political Risks Product Group

	2009	2008
War & Political Risks, Terrorism & Credit	188	215
Accident & Health	134	131
Equine/Livestock	67	70
Contingency	14	15
Total	403	431

Underwriting results for each product group, including underwriting contribution and loss ratios, are shown in the table below.

2009 underwriting results by product group (US$m)

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	2009 rate change	2008 Rate change
Aerospace	490	412	365	77	60%	6%	(1%)
Casualty	797	678	648	(27)	86%	3%	(3%)
Energy/Marine	577	469	470	98	55%	8%	(6%)
Property	378	300	282	56	47%	3%	(7%)
Reinsurance	1,070	947	906	376	40%	9%	(5%)
Specialty/War & Political Risks	403	385	378	75	61%	1%	2%

During 2009 pricing conditions were strongest across catastrophe-exposed classes of business, most notably Property Treaty Reinsurance, Energy and US Property Insurance. In response to market conditions and reflecting the flexibility of Catlin's structure, aggregate capacity was reallocated to business classes where conditions were strongest.

As a result, gross premiums written by the Reinsurance Product Group increased by 15 per cent, primarily driven by Property Treaty volumes. The combination of increased volume and a benign catastrophe year resulted in an underwriting contribution of US$376 million and a 40 per cent loss ratio.

Conversely, gross premiums written decreased for both the Energy/Marine and Property Product Groups. Energy/Marine premium volume reduced as assureds sought to restructure programmes and increase retentions due to tightening conditions in the aftermath of Hurricane Ike. Despite the reduction in catastrophe-exposed business being written within these groups, the Energy/Marine and Property Product Groups produced loss ratios of 55 per cent and 47 per cent, respectively.

Aerospace premium volume increased during 2009 by 23 per cent due to three major factors: the introduction of General Aviation business written by Catlin US; increased rates on Airline business written primarily by the London hub; and the continued development of Aviation as a class of business underwritten by the International hubs.

The Specialty/War & Political Risk Product Group, which includes Catlin's credit insurance portfolio, was most impacted by claims produced by the economic crisis. Credit-related volumes were reduced as underlying risk was reassessed. Strong underlying performance was produced by the Terrorism, Crisis Management, Accident & Health and Bloodstock/Livestock accounts, but the impact of Credit-related large single-risk losses increased the product group's loss ratio to 61 percent.

The Casualty Product Group's loss ratio and underwriting contribution were impacted by both competitive pricing conditions, particularly for wholesale business underwritten in the London market, and significant large single-risk losses. In the light of poor pricing conditions for these areas of the Casualty portfolio, Catlin since 2007 has reduced volumes and exposures, decreased line sizes, tightened coverage terms and purchased additional reinsurance protection. However, market conditions are favourable for other areas of the Casualty portfolio, particularly for Financial classes and niche Professional lines.

Overall casualty volumes increased by 18 per cent - or US$120 million - in 2009. Approximately two-thirds of this growth came from Financial lines, where pricing has increased following the economic crisis. Most of the remainder was produced from niche and retail classes written by Catlin US, such as Architects & Engineers and Construction Professional Liability lines.

Risk transfer

The goal of Catlin's risk transfer programme is to reduce the Group's earnings volatility and improve capital efficiency. The programme is designed and executed centrally in order to maximise purchasing power.

The key elements of the programme include:

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

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

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

The Group has a number of in-force capital markets risk transfer transactions, which are described in the table below.

Capital market risk transfer transactions

Issuer

Domicile

Perils

Trigger

Expiration

Limit (US$m)

Format

Newton Re Series 2007-1

Cayman

US hurricane and earthquake

Large single events as measured by Property Claims Services

December 2010

$225

Swap

Newton Re Series 2008-1

Cayman

US hurricane and earthquake, European windstorm, Japanese typhoon and earthquake

Annual aggregate reinsurance covering accumulated losses related to Property Treaty Reinsurance

December 2010

$150

Reinsurance

The financial strength of the Group's risk transfer counterparties is of high quality as more of the risk transfer programme is placed with higher-rated and collateralised markets. The financial strength of risk transfer partners is monitored on a regular basis by the Group's Reinsurance Security Committee, which is independent from the reinsurance purchasing team.

2010 Outlook

The good financial performance during 2009 by property/casualty insurers and reinsurers, along with an improvement in the availability of capital as the economic crisis recedes, is increasing carriers' risk appetite and attracting new insurers to the broad marketplace.

This increased capacity is affecting pricing during 2010, most notably across direct classes of business. Property reinsurance rates, which during 2009 were at or near historic highs, are seeing experience-related rate reductions in the aftermath of a benign catastrophe year. However, the reductions are being offset to a degree by the smaller number of counterparties now offering reinsurance capacity.

Renewals at 1 January 2010 were disciplined, with renewal pricing broadly flat across the Group. This trend was particularly true for Property Treaty Reinsurance, which dominates the 1 January renewals. Capacity-related reductions for US Property Treaty business were offset by experience-driven increases on International treaties, most notably in Europe. Across the portfolio average weighted premium rates increased by approximately 1 per cent for business incepting in January.

Despite competitors' increased risk appetites, Catlin's signings remained strong, particularly in London where Property Treaty signings were at an historic high level.

Market pricing for certain longer tail business classes remains inadequate, and signs of a market correction are not yet evident. However, the Group believes that it is only a matter of time before the market reconsiders the profitability of these classes and adjusts pricing accordingly. In the meantime, Catlin will continue to exercise underwriting discipline in these areas and wait for adequate margin to return.

Gross premiums written as at 31 January 2010 increased 8 per cent compared with the previous year on a constant currency basis (31 January 2009: 8 per cent increase); the increase was 11 per cent on an as reported basis.

As the market enters a softer phase of the underwriting cycle, Catlin recognises that it is increasingly important to adhere to the three fundamentals of profitable underwriting - access to business, accurate pricing and portfolio management. Our underwriting philosophy and strategy is designed to differentiate Catlin from our peers and provide the Group with further opportunities for diversified and profitable growth.

Business Segments

Catlin defines its financial reporting segments by regulated underwriting entity. The four reporting segments are:

· Catlin Syndicate, which comprises direct insurance and reinsurance business underwritten by the Catlin Syndicate at Lloyd's of London;

· Catlin Bermuda (Catlin Insurance Company Ltd.), which primarily underwrites reinsurance business, including intra-Group reinsurance;

· Catlin UK (Catlin Insurance Company (UK) Ltd.), which primarily underwrites direct insurance; and

· Catlin US, which underwrites specialty insurance and reinsurance in the United States through two US-domiciled insurers: Catlin Insurance Company Inc., which writes on an admitted basis, and Catlin Specialty Insurance Company Inc., which writes non-admitted business. Whilst Catlin US also underwrites business on behalf of the Catlin Syndicate and Catlin UK, this business is not included in the Catlin US reporting segment.

Catlin also reports financial results for business based on its underwriting hubs - London, Bermuda, US and International (comprising Asia-Pacific, Europe and Canada). Catlin has historically reported financial results based on regulated underwriting entity and these results are regularly reviewed by management.

The table below illustrates how the business produced by the underwriting hubs is apportioned to the financial reporting segments. Some hubs underwrite on behalf of more than one legal entity.

Gross written premiums by underwriting hubs as reflected in reporting segments (US$m)
	Underwriting hub
	London	Bermuda	US	International	Total
Catlin Syndicate	1,995	--	239	262	2,496
Catlin Bermuda	--	421	--	--	421
Catlin UK	352	--	13	104	469
Catlin US	--	--	329	--	329
	2,347	421	581	366	3,715

Comparisons of gross and net premiums written for the four financial reporting segments in 2009 and 2008 are shown in the table below.

Gross and net premiums written by business segments in 2009 and 2008
2009 US$m	Gross premiums written excluding intra-Group reinsurance	Intra-Group reinsurance	Gross premiums written including intra-Group reinsurance	Net premiums written excluding intra-Group reinsurance	Net premiums written including intra-Group reinsurance
Catlin Syndicate	2,496	6	2,502	2,143	1,337
Catlin Bermuda	421	1,232	1,653	371	1,603
Catlin UK	469	--	469	397	166
Catlin US	329	--	329	257	62
Intra-Group Reinsurance	--	--	(1,238)	--	--
Total	3,715	1,238	3,715	3,168	3,168
2008 US$m
Catlin Syndicate	2,416		2,416	1,733	956
Catlin Bermuda	392	1,062	1,454	331	1,392
Catlin UK	487		487	425	230
Catlin US	142		142	122	33
Intra-Group Reinsurance	-		(1,062)	-	-
Total	3,437	1,062	3,437	2,611	2,611

The Catlin Syndicate wrote 67 per cent of the Group's gross premiums in 2009 excluding intra-Group reinsurance (2008: 70 per cent). This decrease reflects the reduction in premium volume written by the Catlin Syndicate during 2009, attributable to exchange rate fluctuations, along with the increase in gross premiums written relating to the other three segments.

The Catlin Syndicate wrote 42 per cent of the Group's net premiums written including intra-Group reinsurance (2008: 37 per cent), reflecting the cessation at 31 December 2008 of the quota share reinsurance provided to the Catlin Syndicate by some of the third-party Names that had formerly provided capital to Wellington Syndicate 2020. The percentage of net premiums written including intra-Group reinsurance by Catlin Bermuda decreased to 51 per cent in 2009 (2008: 53 per cent), even though the segment's net premium volume increased by 15 per cent.

Additional information and analysis regarding the business segments can be found in Note 3 to the Financial Statements.

Financial Review

The following pages contain commentary on Catlin's consolidated financial statements for the year ended 31 December 2009, which are prepared in accordance with Accounting Principles Generally Accepted in the United States ('US GAAP').

Consolidated Results of Operations

Set out below are the Consolidated Results of Operations for the 2009 year with comparison to the 2008 results.

US$m	2009	2008	% change
Revenues
Gross premiums written	3,715	3,437	8
Reinsurance premiums ceded	(547)	(826)	(34)
Net premiums written	3,168	2,611	21
Change in unearned premiums	(250)	(15)	NM
Net premiums earned	2,918	2,596	12

Net investment return	414	(91)	NM
Change in fair value of catastrophe swaps	(31)	(13)	138
Net realised gains/(losses) on foreign currency exchange	30	(21)	NM
Other income	4	15	(73)
Total revenues	3,335	2,486	34
Expenses
Losses and loss expenses	1,681	1,632	3
Policy acquisition costs	586	510	15
Administrative and other expenses	449	339	32
Financing costs	16	18	(11)
Total expenses	2,732	2,499	9

Income/(loss) before income taxes	603	(13)	NM
Income tax (expense)/benefit	(50)	10	NM
Net income/(loss)	553	(3)	NM
Preferred share dividend	(44)	(44)	-
Net income/(loss) available to common stockholders	509	(47)	NM

Loss ratio (1)	57.6%	62.9%
Expense ratio(2)	31.5%	32.0%
Combined ratio(3)	89.1%	94.9%
Tax rate(4)	8.3%	NM
Return on net tangible assets(5)	33.2%	(2.8%)
Return on equity(6)	24.3%	(1.9%)

NM Not meaningful

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

(2) Calculated as the total of policy acquisition costs, most administrative expenses and other expenses divided by net earned premiums; financing expenses and restructuring costs, 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)/benefit divided by income/loss before income taxes

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

Catlin's strong financial performance during 2009 included record pre-tax profits and net income, compared with an operating loss in 2008 The return on net tangible assets was 33.2 per cent (2008: 2.8 per cent loss); the return on equity amounted to 24.3 per cent (2008: 1.9 per cent loss).

Contributing to the Group success in 2009 were:

· Substantially improved underwriting conditions. Average weighted premiums rates increased by 6 per cent across Catlin's portfolio of business, compared with an average rate decrease of 4 per cent in 2008.

· A significant improvement in the loss ratio, leading to a higher underwriting contribution. The Group's loss ratio decreased to 57.6 per cent compared to 62.9 per cent in 2008 when Catlin reported losses of approximately US$250 million (net of reinsurance and reinstatement premiums) arising from Hurricanes Ike and Gustav. Catlin did not incur any catastrophe losses during 2009, although large single-risk losses increased, in part due to credit losses sustained in the first half of the year.

· A rebound in investment performance. Total investment return in 2009 amounted to 5.9 per cent, compared with the negative return of 1.4 per cent in 2008.

The following commentary compares Catlin's 2009 financial results with the results for 2008.

Gross premiums written

Gross premiums written increased by 8 per cent to US$3.7 billion (2008: US$3.4 billion). The increase on a constant currency basis was 12 per cent. Gross premiums written by the Bermuda, US, Asia-Pacific, European and Canadian underwriting hubs increased substantially, rising by 36 per cent to US$1.4 billion (2008: US$1.0 billion). These underwriting hubs accounted for 37 per cent of total gross premiums (2008: 29 per cent). Gross premiums written by the London underwriting hub decreased by 4 per cent on a reported basis, as was expected, although volume remained broadly constant if foreign exchange movements are excluded.

Rates improved during the period for nearly all classes of business underwritten by Catlin, with average weighted premium rates rising by 6 per cent; average weighted premiums rates decreased by 3 per cent for business incepting in 2008. Rates increased by a weighted average of 10 per cent during 2009 for catastrophe-exposed business classes, whilst non-catastrophe rates increased by a weighted average of 4 per cent.

Seventy-six per cent of the gross premiums written were denominated in US dollars, 12 per cent in sterling (including convertible currencies)' and 12 per cent in other currencies.

Reinsurance

Reinsurance premiums ceded decreased by US$279 million during the year to US$547 million (2008: US$826 million). The decrease was primarily attributable to the cessation at 31 December 2008 of the quota share reinsurance provided to the Catlin Syndicate by some of the third-party Names that had formerly provided capital to Wellington Syndicate 2020. The cessation of this quota share reinsurance reduced reinsurance premiums ceded in 2009 by US$233 million.

Reinsurance premiums ceded are analysed in the table below.

US$m	2009	Percentage of GPW	2008	Percentage of GPW
Third-party protections	523	14.1%	569	16.6%
Names' quota share	24	0.6%	257	7.5%
	547	14.7%	826	24.0%
Element of multi-year contracts relating to future periods	(14)	(0.4%)	(66)	(1.9%)
	533	14.3%	760	22.1%

Third-party reinsurance costs expressed as a percentage of written premiums were approximately 9 percentage points lower than in 2008. The reinsurance programme for 2008 included a number of multi-year contracts covering 2008 and future years. The element of the multi-year contracts which related to future periods was approximately US$14 million in 2009 (2008: US$66 million).

Net premiums earned

Net premiums earned increased by 12 per cent to US$2.9 billion (2008: US$2.6 billion); the increase was 17 per cent on a constant currency basis. This increase, which was in line with the Group's expectations, was partly due to increased gross premiums written but also due to the embedded growth arising from the Wellington acquisition, specifically the cessation of the quota share reinsurance of the Catlin Syndicate. The benefits of embedded growth will continue for two additional years, increasing net premiums earned by an estimated US$120 million in 2010 and an additional US$10 million in 2011.

Losses and loss expenses

The Group incurred no catastrophe losses in 2009, although this was partially offset by a significant increase in large single-risk losses. Overall, the loss ratio decreased to 57.6 per cent (2007: 62.9 per cent). In 2008 losses relating to Hurricanes Ike and Gustav amounted to approximately US$250 million net of reinsurance and reinstatement premiums, increasing the loss ratio by 10.4 percentage points.

The decrease in the Group's loss ratio during 2009 is analysed in the table below:

	2009	2008
Attritional loss ratio	53.7%	54.0%
Catastrophe losses	-	10.4%
Large single-risk losses	7.1%	3.1%
Release of reserves	(3.2%)	(4.6%)
Reported loss ratio	57.6%	62.9%

Approximately half of the large single-risk losses were credit insurance claims arising from the economic crisis that were reported and reserved in the first half of the year. Without the credit losses, large single-risk loss experience would have been broadly in line with the 2008 experience.

The Group released US$94 million from prior year loss reserves during 2009, an amount equating to 2 per cent of opening reserves (2008: 3 per cent). The majority of the reserve releases related to the 2005 to 2007 accident years.

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 31.5 per cent (2008: 32.0 per cent). The components of the expense ratio and other expenses are analysed in the table below.

US$m	2009	Components of expense ratio	2008	Components of expense ratio
Policy acquisition costs	586	20.1%	510	19.7%
Administrative expenses
Underwriting hub expenses	194	6.7%	187	7.2%
Group expenses	90	3.0%	89	3.4%
Lloyd's expenses	49	1.7%	44	1.7%
Other expenses:
Employee incentives	86	-	(8)	-
Other administrative expenses	30	-	27	-
	1,035	31.5%	849	32.0%

Catlin has amended the method used to calculate the expense ratio to exclude costs of profit-related bonuses, employee share option schemes and certain group corporate costs. The revised methodology allows the Group's expense and combined ratios to give a closer representation of the costs of underwriting. The expense and combined ratios for 2008 have been restated using this methodology.

The policy acquisition cost ratio increased to 20.1 per cent due to changes in the mix of business underwritten by the Group (2008: 19.7 per cent).

Administrative expenses represent 11.4 percentage points of the overall expense ratio (2008: 12.3 percentage points).

As a result of the net profits reported by the Group in 2009, management and staff bonuses - which are based on both income before tax and the return on equity achieved by the Group - were significantly higher than in 2008. In addition, the valuation of entitlements under share option schemes also increased during 2009. Finally, a significant part of administrative and other expenses are incurred in sterling. On average, sterling was weaker against the dollar during 2009 compared with 2008, producing savings in dollar terms.

Other administrative expenses include group overheads and are not included in the calculation of the expense ratio.

Financing costs also are excluded from the expense ratio. These 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.

Underwriting contribution

The combined ratio was 89.1 per cent (2008: 94.9 per cent). This represents a record underwriting contribution of US$651 million, a 43 per cent increase (2008: US$454 million). Of the total underwriting contribution, 61 per cent was produced by the London underwriting hub; 39 per cent was produced by the Group's other underwriting hubs.

Total investment return

Total return on average investments amounted to a record 5.9 per cent (2008: 1.4 per cent loss). The table below summarises the total return on investments and cash during the year.

US$m	2009	2008
Total investments and cash as at 31 December	7,693	5,933

Investment income	187	238
Net gains/(losses) on investments in funds	141	(212)
Net gain/(losses) on fixed maturities and short-term investments	91	(111)
Total investment return	419	(85)
Investment expenses	(5)	(6)
Net investment return	414	(91)

Change in fair value of catastrophe swaps

As part of its third-party reinsurance arrangements, the Group has entered into catastrophe swap arrangements with certain special purpose entities. Information about these arrangements is contained in the Underwriting Review and Note 9 to the Financial Statements.

The change in fair value of these swaps during 2009 is shown in the table below:

US$m	2009	2008
Premiums in respect of catastrophe swaps	(26)	(28)
Change in value of catastrophe swaps	(5)	15
	(31)	(13)

The fair value of the swaps is based on the inverse of the value of the bonds issued by the special purpose entities. The value of the bonds has increased in the current economic climate, and therefore the value of the swaps has reduced.

Net realised gains/(losses) on foreign currency

Catlin reported a gain on foreign currency exchange amounting to US$30 million (2008: US$21 million loss). This gain was primarily due to the 11 per cent rise in the sterling-US dollar exchange rate to 1.62 at year-end 2009 (2008: 1.46). Catlin reports its financial results in US dollars but undertakes significant sterling transactions. It also owns operating and financing subsidiaries which have accounting (functional) currencies which are not dollars, the largest of which is sterling. The Group therefore incurs net exchange gains on transactions and open balances, including net investments, during a period of sterling strengthening.

Income tax (expense)/benefit

The Group's effective tax rate was 8.3 per cent (2008: $10 million tax benefit). The principal driver of the effective tax rate continues to be the jurisdiction of the underwriting entities in which profits and losses arose.

Net income/(loss) available to common stockholders

After payment of dividends amounting to US$44 million to holders of Catlin's non-cumulative perpetual preferred shares (2008: US$44 million), net income available to common shareholders amounted to a record US$509 million (2008: US$46 million loss). The return on net tangible assets was 33.2 per cent (2008: 2.8 per cent loss); the return on equity amounted to 24.3 per cent (2008: 1.9 per cent loss).

Balance Sheet

A summary of the balance sheet at 31 December 2009 and 2008 is set out below.

US$m	2009	2008	% change
Investments and cash	7,693	5,933	30
Securities lending collateral	15	33	(55)
Intangible assets and goodwill	718	651	10
Premiums and other receivables	1,133	1,080	5
Reinsurance recoverable	1,441	1,226	18
Deferred acquisition costs	292	247	18
Other assets	390	489	(20)

Loss reserves	(5,392)	(4,606)	17
Unearned premiums	(1,724)	(1,536)	12
Subordinated debt	(97)	(98)	(1)
Reinsurance payable	(653)	(476)	37
Other liabilities	(523)	(441)	19
Securities lending payable	(15)	(33)	(55)
Stockholders' equity	3,278	2,469	33

The major items on the balance sheet are analysed below.

Investments and cash

Investments and cash increased by US$1.8 billion or 30 per cent to US$7.7 billion (2008: US$5.9 billion).

The increase includes the Rights Issue proceeds of approximately $289 million and the reinsurance to close of Wellington Syndicate 2020 into the Catlin Syndicate in early 2009, which resulted in a transfer of invested assets of approximately $460 million. The remaining increase is related to positive investment performance and cash flow from the Group's insurance operations.

Securities lending

Catlin has continued a securities lending arrangement which was commenced in early 2006. Under this arrangement certain of the fixed maturity investments are loaned to third parties through a lending agent. The Group maintains control over the securities it lends, retains the earnings and cash flows associated with the loaned securities, and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required to be established by the borrower at a minimum rate of 102 per cent of the market value of the loaned securities; this is monitored and maintained by the lending agent.

There was a reduced level of lending during the year, largely reflecting lower fair values as well as reduced holdings by the Group of the types of securities which are commonly lent.

Intangible assets and goodwill

The increase in intangible assets and goodwill during the year resulted primarily from foreign exchange movements since the majority of the intangibles and goodwill are denominated in sterling and arose on the acquisition of Wellington. The following table sets out the principal components of this asset.

US$m	2009	2008
Purchased Lloyd's syndicate capacity	634	571
Distribution network	2	2
Surplus lines licenses	6	7
Goodwill on acquisition of Wellington	62	57
Other goodwill	14	13
	718	651

Catlin is required under US GAAP to establish a liability for deferred taxation in relation to the value of intangible assets and goodwill arising on the Wellington acquisition. This liability is included in 'other liabilities' and amounts to US$95 million (2008: US$87 million), with the increase in value due to foreign exchange movements.

Premiums and other receivables

Premiums and other receivables increased during 2009 by US$53 million or 5 per cent. This growth is in line with the increase in premiums written during the year compared with 2008.

Reinsurance recoverable

Amounts receivable, and anticipated recoveries from reinsurers, rose by US$215 million or 18 per cent. Reinsurance recoverables represent 44 per cent of stockholders' equity (2008: 50 per cent).

Deferred acquisition costs

Deferred acquisition costs represented 17 per cent of unearned premiums at 31 December 2009 (2008: 16 per cent).

Loss reserves

Gross loss reserves have increased by US$786 million or 17 per cent during 2009, primarily due to the reinsurance to close of Wellington Syndicate 2020 into the Catlin Syndicate.

The Group has seen a surplus from prior accident years in aggregate. More than 90 per cent of net reserves relate to the 2003 and later accident years.

The Group released US$94 million from prior year loss reserves during 2009, an amount equal to approximately 2 per cent of opening net reserves.

Unearned premiums

Unearned premiums have increased by US$188 million or 12 per cent during the year.

Notes payable and subordinated debt

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

Reinsurance payable

Reinsurance payable has increased by US$177 million - or 37 per cent - compared with 31 December 2008. The December 2008 balance includes a US$68 million negative balance for amounts due following the commutation of a whole account stop-loss contract relating to the Catlin Syndicate. In addition, the amount payable on the quota share reinsurance provided by the former Wellington Names increased by US$19 million. This contract is on a funds withheld basis and therefore the balance increases until the contract is commuted and settled.

Stockholders' equity

The chart below shows the principal components of the change in stockholders' equity during the year:

US$m	2009	2008
Stockholders' equity, 1 January	2,469	3,017
Net income/(loss)	553	(3)
Common share dividends declared	(115)	(124)
Preferred share dividends declared	(44)	(44)
Currency translation gain/(loss)	112	(325)
Rights Issue	289	-
Other, including treasury share purchases	14	(52)
Stockholders' equity, 31 December	3,278	2,469

The currency translation gain is analysed in the table below:

US$m	2009	2008
Foreign exchange, excluding intangible assets	52	(125)
Intangible assets - revaluation gains/(losses) on sterling balances	60	(200)
	112	(325)

The 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 are 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 related to intangible assets.

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

US$m	Amount	US$	Sterling	Other	Total
Net tangible assets(1)	2,066	76%	18%	6%	100%
Intangible assets	622	3%	97%	--	100%
Net assets(1)	2,688	59%	36%	5%	100%

(1) Excludes preferred shares

In line with the management's continued focus on underwriting hubs, Catlin expects in 2010 to revise the attribution of intangible assets to segments to match those assets to the relevant business flows. Commensurate with the continuing planned growth of the non-London hubs, this reallocation is expected to lead to a change in currency of approximately 85 per cent of those intangibles from sterling to US dollars.

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.

At a special general meeting held on 9 March 2009, a resolution was passed increasing the authorised share capital of the Company from $4 million divided into 400,000,000 Common Shares of par value $0.01 each to $5 million divided into 500,000,000 Common Shares of par value $0.01 each.

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 below.

US$m	2009	2008
Total stockholders' equity	3,278	2,469
Less: attributable to preferred shares	(590)	(590)
	2,688	1,879
Less: intangible assets	(622)	(564)
Net tangible assets	2,066	1,315

Book value per share (US$)(1)	$7.68	$6.61
Book value per share (sterling)(1)	£4.74	£4.53

Net tangible assets per share (US$)(1)	$5.90	$4.63
Net tangible assets per share (sterling)(1)	£3.64	£3.17

(1) Book value and tangible book value per share at 31 December 2008 has been adjusted for the bonus factor implied by the Rights Issue

The growth in sterling book value per share illustrates the effect of the movement in the dollar-to-sterling exchange rate during 2009. 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 15 per cent in 2009, whilst total book value grew by 5 per cent.

Capital position

The charts below provide two views of capital - from a policyholder security perspective and from an investor's perspective - and demonstrate Catlin's continuing strength and capital efficiency.

The Group's capital base was strengthened following the Rights Issue and record profits during 2009. The strong, liquid balance sheet provides excellent security for policyholders, as reflected in ratings of 'A' (Excellent) from A.M. Best and 'A' (Strong) from Standard & Poor's.

The Group's capital from a policyholder security perspective can be viewed as follows:

US$m	31 December 2009
Paid-up capital (net of intangibles)	2,066
Preferred shares	590
Subordinated debt	97
Lloyd's LOC facilities	518
Total	3,271

Regulatory capital at risk(1)	1,849
Surplus capital to regulatory capital at risk	1,422
Surplus capital as % of regulatory capital at risk	77%

(1) Total regulatory capital is $2.2 billion and represents the sum of Funds at Lloyd's and UK, Bermuda and US regulatory capital. Regulatory capital at risk reflects Catlin's assessment of regulatory capital held in respect of third-party business underwritten

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 2009 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.

The Group's capital from an investor's perspective is analysed in the table below:

US$m	31 December 2009
Paid-up capital (net of intangibles)	2,066
Preferred shares	590
Capital available for underwriting	2,656

Economic capital(1)	2,231
Capital buffer to economic requirements	425
Capital buffer as % of economic capital	19%

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

Rebased per-share amounts and ratios

Catlin has rebased its reported per-share amounts following the Rights Issue completed in March 2009 and has rebased some of its key ratios, as shown in the table below.

	2009	2008	2007	2006(1)	2005
Basic earnings per share (US$)(2)	1.52	(0.16)	1.61	1.39	0.11
Dividends per share (US cents)(2)	40.0	37.91	43.85	38.52	24.02
Dividends per share (pence)(2)	25.0	23.23	21.92	20.09	13.54
Book value per share (US$)(2)	7.68	6.61	8.38	7.05	5.22
Book value per share (£)(2)	4.74	4.53	4.21	3.60	3.03
Net tangible assets per share (US$)(2)	5.90	4.63	5.73	4.46	4.86
Net tangible assets per share (£)(2)	3.64	3.17	2.88	2.28	2.83
Expense ratio(3)	31.5%	32.0%	34.1%	32.6%(4)	30.9%
Combined ratio(3)	89.1%	94.9%	80.6%	82.6%(4)	102.0%
Return on equity(5)	24.3%	(1.9%)	22.9%	26.2%(4)	2.0%
Return on net tangible assets(5)	33.2%	(2.8%)	36.1%	29.4%(4)	2.2%

(1) Catlin as reported except where noted

(2) Per share amounts previously reported have been adjusted by a factor of 87.34% to reflect the effects of the 2 for 5 Rights Issue in March 2009.

(4) Catlin and Wellington combined

(5) The methodology for calculating the return on equity and return on net tangible assets has been changed so that returns are calculated by reference to opening balances, adjusted for the effects of capital movements in the year. Previously, returns were based on average balances.

Investments

Investment markets recovered during 2009 following the unprecedented levels of volatility encountered during the previous year. This recovery had a positive impact on Catlin's investment performance, as the Group's total return on average investments increased to 5.9 per cent (2008: 1.4 per cent loss). Total investment income amounted to US$419 million (2008: US$85 million loss).

Catlin benefitted during 2009 from the recovery in value of the Group's diversified asset holdings. Narrowing spreads on fixed income investments also led to the recovery of unrealised losses sustained during the previous year.

The Group recognises that its investment performance during 2009 was the result of unusual market conditions, and as the Group currently maintains a defensive investment strategy it is recognised that performance in future years will be more challenging.

Investment performance

The Group's total investment return of 5.9 per cent during 2009 is broken down by major asset category in the table below.

Contribution to investment return

	2009		2008
	US$m	%	US$m	%
Investment income	187	2.6%	238	3.9%
Net gains/(losses) on fixed income investments	91	1.3%	(111)	(1.8)%
Net gains/(losses) on funds	141	2.0%	(212)	(3.5)%
Total investment return	419	5.9%	(85)	(1.4)%

Catlin's investment performance during 2009 and 2008 is further analysed in the table below.

Investment performance by major asset category

2009	Average Allocation during period US$m	Average Allocation during period %	Return US$m	Return %
Fixed income	3,355	47.1%	245	7.3%
Cash & short-term investments	3,000	42.1%	33	1.1%
Diversified assets	765	10.8%	141	18.5%
Total	7,120	100%	419	5.9%

2008	Average Allocation during period US$m	Average Allocation during period %	Return US$m	Return %
Fixed income	2,886	47.0%	42	1.5%
Cash & short-term investments	2,329	37.9%	85	3.7%
Diversified assets	923	15.1%	(212)	(23.0)%
Total	6,138	100%	(85)	(1.4)%

Contributing to the fixed income return was spread tightening in asset- and mortgage-backed securities and, to a lesser extent, investment-grade corporate bonds. Spread tightening in these sectors also contributed to the performance of the diversified assets.

Investment portfolio

Catlin's total cash and investments increased by 30 per cent during 2009 to US $7.7 billion (2008: US $5.9 billion). A portion of this increase resulted from positive investment performance and cash flow from the Group's operations. However, the increase also includes proceeds of US$289 million from the Rights Issue completed in March and the transfer of approximately US$460 million resulting from the third-party Names' share of the reinsurance to close of Wellington Syndicate 2020 into the Catlin Syndicate. That transaction took place in the first quarter of 2009 under Lloyd's three-year accounting rules.

The Group made significant changes to its investment strategy and the composition of its asset portfolio during 2009. Following the acquisition of Wellington Underwriting plc in 2006, the Group expanded the allocation devoted to diversified assets, including equity and hedge funds. However, during the past year Catlin concluded that such a strategy was no longer appropriate in the light of the economic climate.

During 2009 Catlin divested all of its equity holdings. It redeemed US$340 million of its hedge fund holdings, and at 31 December 2009 had issued redemption notices for hedge fund holdings whose proceeds are expected to amount to approximately US$170 million. In addition, Catlin disposed of some sub-investment grade corporate bond holdings during 2009 and increased its holdings of investment-grade corporate bonds and bonds which are guaranteed by the US Federal Deposit Insurance Corporation. The Group maintained - in monetary terms - its holding of short-dated, high-grade asset-backed securities.

Catlin's asset portfolio at 31 December 2009 was extremely liquid and defensively positioned. Cash and short-term investments were equal to 43 per cent of total investment assets at 31 December 2009 (2008: 40 per cent). Liquid assets - which are defined by the Group as cash, government securities and fixed income securities with less than six months to maturity - amounted to 62 per cent of investment assets (2008: 60 per cent).

The group's asset allocation at 31 December 2009 by asset category is shown in the table below.

Asset allocation at 31 December 2009

	2009	2008
Fixed income investments
Asset-backed securities	3%	4%
Agency mortgage-backed securities	5%	5%
Non-agency mortgage-backed securities	2%	3%
Commercial mortgage-backed securities	3%	3%
Corporate bonds	11%	9%
FDIC-backed corporate bonds	5%	3%
US government and agency securities	10%	12%
Non-US government and agency securities	11%	8%
	50%	47%
Cash and short-term investments	43%	40%
Diversified assets (equity funds and hedge funds/funds of funds)	7%	13%
	100%	100%

The high level of liquidity at year-end 2009 gives the Group the latitude during 2010 to invest in instruments, primarily in the fixed-income sector, that show the greatest potential opportunities, and 95 per cent of the government/agency securities relate to G7 countries. The Group will continue to retain holdings in certain hedge funds that are aligned with this opportunistic strategy.

Asset quality

Catlin's fixed income portfolio at 31 December 2009 consisted of high-quality assets, with 96 per cent of the portfolio held in government/agency securities or instruments rated 'A' or higher. The quality of the Group's fixed income portfolio is analysed in Table 4.

Fixed income investments by rating at 31 December 2009

2009	Government/ agency	AAA	AA	A	BBB or lower	Assets (US$m)
US government & agencies	19%	--	--	--	--	745
Non-US government & agencies	22%	--	--	--	--	836
Agency-mortgage-backed securities	11%	--	--	--	--	410
FDIC-backed corporate bonds	10%	--	--	--	--	375
Asset-backed securities	--	6%	*	*	*	260
Non-agency mortgage-backed securities	--	1%	*	*	3%	169
Commercial mortgage-backed securities	--	4%	1%	*	*	204
Corporate bonds	--	1%	6%	15%	1%	868
Total	62%	12%	7%	15%	4%	3,867

* Less than 0.5 per cent

Duration

The duration of the fixed income portfolio at 31 December 2009 was 2.3 years (2008: 2.7 years). The duration of the portfolio was relatively short due to the decision to maintain high levels of liquidity and the expectation that yield curves will continue to steepen.

Outlook

Catlin anticipates that investment return in 2010 will be significantly reduced from the favourable performance of the past year. The Group expects that returns on cash and government bonds - which account for more than half of the portfolio - will remain low during 2010. Fixed income spreads during 2009 generally narrowed to the levels prevailing prior to the economic crisis, so fixed income gains of the order reported during the past year cannot be repeated.

Despite the recovery in global investment markets during 2009, Catlin remains cautious regarding economic fundamentals during 2010. However, the high level of liquidity in the Group's portfolio does position Catlin to take advantage of any further dislocations that may occur.

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

All historic premium and claim amounts have been restated using exchange rates as at 31 December 2009 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 broadly in line with the assessments made at the year-end. The reserves from the 2002 and prior accident years represent 8% of the Group's net reserves at 31 December 2009.

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

Summary of Catlin Group net reserves at 31 December 2009 (US$m)
Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	% of total net reserves
2002 and prior	152	188	340	8%
2003	66	42	108	3%
2004	75	78	153	4%
2005	93	289	382	9%
2006	140	199	339	8%
2007(1)	472	118	590	14%
2008(1)	899	18	917	22%
2009(1)	1,375	0	1,375	32%
Sub-total	3,272	932	4,204	100%
Other net reserves(2)			16	0%
Total net reserves			4,220	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 foreign exchange adjustments

Development tables

Estimated ultimate net losses (US$m)

		Accident year
	Wellington accident periods 2006 and prior	2002 and prior	2003	2004	2005	2006	2007	2008	2009	Total
Net premiums earned			942	1,182	1,213	1,354	2,758	2,566	2,939

Net ultimate excluding large losses
Initial estimate(1)	6,023	1,565	430	555	603	645	1,392	1,556	1,799
One year later	5,990	1,585	414	491	543	603	1,460	1,563
Two years later	5,934	1,597	386	468	499	589	1,456
Three years later	5,903	1,638	385	441	478	564
Four years later		1,653	375	429	466
Five years later		1,661	373	434
Six years later		1,665	382
Net ultimate loss ratio excluding large losses
Initial estimate(1)			45.6%	47.0%	49.7%	47.6%	50.5%	60.7%	61.2%
One year later			44.0%	41.5%	44.8%	44.6%	52.9%	60.9%
Two years later			41.0%	39.6%	41.2%	43.5%	52.8%
Three years later			40.9%	37.3%	39.4%	41.6%
Four years later			39.8%	36.3%	38.4%
Five years later			39.6%	36.7%
Six years later			40.6%
Net ultimate large losses
Initial estimate(1)		20		116	334			274
One year later		19		117	386			285
Two years later		19		118	397
Three years later		19		117	401
Four years later		20		121	400
Five years later		23		122
Six years later		23
Net ultimate including large losses
Initial estimate(1)	6,023	1,585	430	671	937	645	1,392	1,830	1,799
One year later	5,990	1,604	414	608	929	603	1,460	1,847
Two years later	5,934	1,616	386	585	896	589	1,456
Three years later	5,903	1,658	385	557	878	564
Four years later		1,673	375	551	866
Five years later		1,684	373	555
Six years later		1,689	382
Net ultimate loss ratio including large losses
Initial estimate(1)			45.6%	56.8%	77.3%	47.6%	50.5%	71.3%	61.2%
One year later			44.0%	51.4%	76.6%	44.6%	52.9%	71.9%
Two years later			41.0%	49.5%	73.9%	43.5%	52.8%
Three years later			40.9%	47.2%	72.4%	41.6%
Four years later			39.8%	46.6%	71.4%
Five years later			39.6%	47.0%
Six years later			40.6%

Cumulative net paid	5,107	1,537	316	481	773	424	822	849	372	10,681
Estimated net ultimate claims	5,903	1,689	382	555	866	564	1,456	1,847	1,799	15,061
Estimated net claim reserves	796	152	66	74	93	140	634	998	1,427	4,380
External quota share							(44)	(80)	(52)	(176)
Estimated claim reserves after external quota share	796	152	66	74	93	140	590	918	1,375	4,204
Other net reserves(2)										16
Booked reserves										4,220

(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 foreign exchange adjustments

Net paid losses (US$m)

	Wellington accident periods 2006 and prior	2002 and prior	2003	2004	2005	2006	2007	2008	2009
Net premiums earned			942	1,182	1,213	1,354	2,758	2,566	2,939

Net paid excluding large loss
Initial estimate(1)	3,842	1,102	97	129	122	159	248	306	372
One year later	4,309	1,230	174	227	230	272	518	675
Two years later	4,755	1,324	231	287	294	362	822
Three years later	5,107	1,380	260	319	350	424
Four years later		1,442	285	343	384
Five years later		1,479	309	359
Six years later		1,516	316
Net paid loss ratio excluding large losses
Initial estimate(1)			10.3%	10.9%	10.1%	11.7%	9.0%	11.9%	12.7%
One year later			18.4%	19.2%	19.0%	20.1%	18.8%	26.3%
Two years later			24.5%	24.3%	24.2%	26.7%	29.8%
Three years later			27.6%	27.0%	28.9%	31.3%
Four years later			30.2%	29.1%	31.7%
Five years later			32.8%	30.4%
Six years later			33.5%
Net paid large losses
Initial estimate(1)		8		72	94			101
One year later		13		113	248			174
Two years later		15		115	347
Three years later		18		117	378
Four years later		19		119	389
Five years later		21		122
Six years later		21
Net paid including large loss
Initial estimate(1)	3,842	1,110	97	201	216	159	248	406	372
One year later	4,309	1,243	174	340	478	272	518	849
Two years later	4,755	1,339	231	402	641	362	822
Three years later	5,107	1,398	260	435	728	424
Four years later		1,461	285	462	773
Five years later		1,501	309	481
Six years later		1,537	316
Net paid loss ratio including large losses
Initial estimate(1)			10.3%	17.0%	17.8%	11.7%	9.0%	15.8%	12.7%
One year later			18.4%	28.7%	39.4%	20.1%	18.8%	33.1%
Two years later			24.5%	34.0%	52.8%	26.7%	29.8%
Three years later			27.6%	36.8%	60.0%	31.3%
Four years later			30.2%	39.1%	63.8%
Five years later			32.8%	40.7%
Six 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

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

Large losses

The following events are included in the large loss sections of the tables above:

Accident year	Event
2002 & prior	World Trade Centre/US Terrorism 9/11
2004	Hurricane Charley
2004	Hurricane Frances
2004	Hurricane Ivan
2004	Hurricane Jeanne
2005	Hurricane Katrina
2005	Hurricane Rita
2005	Hurricane Wilma
2008	Hurricane Ike

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

Commentary on development tables

Accident year 2009

The loss ratio is similar to 2008 (excluding effect of large losses) at the same development point.

Accident year 2008

There has been a small increase in the Hurricane Ike estimate during the year. Loss development excluding large losses has been broadly stable over the year.

Accident years 2003 to 2007

There has been favourable improvement overall since the previous year-end.

Accident years 2002 and prior

There has been broadly stable development in these accident periods since the previous year-end.

Wellington accident periods 2006 and prior

The reserves in these periods have shown releases during the year.

Limitations

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

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

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

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

Aggregate Management

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

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

Modelled gross and net losses

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

Limitations

The modelled outcomes in the tables below are mean losses from a range of potential outcomes. Significant variance around the mean is possible.

Catlin understands that modelling is an inexact science and undertakes mitigating actions against this model uncertainty. Modelling is used to inform and complement the views of both underwriting and actuarial teams.

Examples of catastrophe threat scenarios/Data model output Outcomes derived as at 1 October 2009 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)
US$m	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000

Catlin Group
Gross loss	836	954	1,131	488	455
Reinsurance effect(1)	(535)	(487)	(621)	(118)	(110)
Modelled net loss	301	467	510	370	345

Modelled net loss as a percentage of capital available for underwriting(2)	12.7%	19.7%	21.5%	15.6%	14.5%

(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$2.4 billion at 30 June 2009; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax

Examples of catastrophe threat scenarios/Adjusted data model output Outcomes derived as at 1 October 2009 On a single loss basis (i.e. net losses for individual threat scenarios are not additive)
US$m	Florida (Miami) Windstorm	California Earthquake	Gulf of Mexico Windstorm	European Windstorm	Japanese Earthquake
Estimated industry loss	125,000	78,000	112,000	31,000	51,000

Catlin Group
Gross loss	1,014	1,030	1,363	544	487
Reinsurance effect(1)	(596)	(505)	(706)	(124)	(112)
Modelled net loss	418	525	657	420	375

Modelled net loss as a percentage of capital available for underwriting(2)	17.6%	22.1%	27.7%	17.7%	15.8%

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

Consolidated Balance Sheets

As at 31 December 2009 and 2008

(US dollars in millions)

	2009	2008
Assets
Investments Fixed maturities, at fair value	$3,867	$2,708
Short-term investments, at fair value	796	69
Investments in funds, at fair value	530	801
Total investments	5,193	3,578

Cash and cash equivalents	2,500	2,355
Securities lending collateral	15	33
Accrued investment income	32	31
Premiums and other receivables	1,133	1,080
Reinsurance recoverable	1,441	1,226
Reinsurers' share of unearned premiums	213	302
Deferred policy acquisition costs	292	247
Intangible assets and goodwill	718	651
Catastrophe swaps, at fair value	1	7
Other assets	144	149
Total assets	$11,682	$9,659

Liabilities and Stockholders' Equity
Liabilities
Reserves for losses and loss expenses	$5,392	$4,606
Unearned premiums	1,724	1,536
Reinsurance payable	653	476
Accounts payable and other liabilities	289	248
Subordinated debt	97	98
Foreign exchange derivatives, at fair value	-	17
Securities lending payable	15	33
Deferred tax liability (net)	234	176
Total liabilities	$8,404	$7,190

Stockholders' equity
Common stock	$4	$3
Preferred stock	590	590
Additional paid-in capital	1,938	1,624
Treasury stock	(62)	(55)
Accumulated other comprehensive loss	(189)	(301)
Retained earnings	997	608
Total stockholders' equity	3,278	2,469
Total liabilities and stockholders' equity	$11,682	$9,659

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

Approved by the Board of Directors on 10 February 2010

Stephen Catlin

Director

Benjamin Meuli

Director

Consolidated Statements of Operations

For the years ended 31 December 2009 and 2008

(US dollars in millions, except per share amounts)

	2009	2008
Revenues
Gross premiums written	$3,715	$3,437
Reinsurance premiums ceded	(547)	(826)
Net premiums written	3,168	2,611
Change in net unearned premiums	(250)	(15)
Net premiums earned	2,918	2,596
Net investment return	414	(91)
Change in fair value of catastrophe swaps	(31)	(13)
Net realised gains/(losses) on foreign currency exchange	30	(21)
Other income	4	15
Total revenues	3,335	2,486

Expenses
Losses and loss expenses	1,681	1,632
Policy acquisition costs	586	510
Administrative and other expenses	449	339
Financing costs	16	18
Total expenses	2,732	2,499
Net income/(loss) before income tax	603	(13)
Income tax (expense)/benefit	(50)	10
Net income/(loss)	553	(3)
Preferred stock dividend	(44)	(44)
Net income/(loss) to common stockholders	$509	$(47)

Earnings per common share
Basic	$1.52	$(0.16)
Diluted	$1.47	$(0.16)

Consolidated Statements of Changes in Stockholders' Equity

For the years ended 31 December 2009 and 2008

(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 2008	$3	$590	$1,623	$(6)	$38	$769	$3,017
Comprehensive income:
Cumulative effect of adoption of the fair value option	-	-	-	-	(14)	14	-
Net loss to common stockholders	-	-	-	-	-	(47)	(47)
Other comprehensive loss	-	-	-	-	(325)	-	(325)
Total comprehensive loss	-	-	-	-	(339)	(33)	(372)
Stock compensation benefit	-	-	(2)	-	-	-	(2)
Dividends	-	-	-	-	-	(124)	(124)
Deferred compensation obligation	-	-	4	-	-	(4)	-
Treasury stock purchased	-	-	-	(50)	-	-	(50)
Distribution of treasury stock held by Employee Benefit Trust	-	-	(1)	1		-	-
Balance 31 December 2008	$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

Consolidated Statements of Cash Flows

For the years ended 31 December 2009 and 2008

(US dollars in millions)

	2009	2008
Cash flows provided by/(used in) operating activities
Net income/(loss)	$553	$(3)
Adjustments to reconcile net income/(loss) to net cash provided by operations:
Amortisation and depreciation	17	22
Amortisation of net discounts of fixed maturities	(10)	(4)
Net (gains)/losses on investments	(232)	324
Cessation of Syndicate 2020	112	-
Changes in operating assets and liabilities
Reserves for losses and loss expenses	36	731
Unearned premiums	147	158
Premiums and other receivables	(15)	(124)
Deferred policy acquisition costs	(36)	(24)
Reinsurance payable	159	285
Reinsurance recoverable	28	(355)
Reinsurers' share of unearned premiums	103	(122)
Accounts payable and other liabilities	10	36
Deferred taxes	27	14
Other	(23)	(20)
Net cash flows provided by operating activities	876	918

Cash flows used in investing activities
Purchases of fixed maturities	(2,163)	(1,393)
Proceeds from sales of fixed maturities	1,291	1,360
Proceeds from maturities of fixed maturities	117	50
Net purchases, sales and maturities of short-term investments	(722)	(21)
Net settlements of futures and options	-	-
Purchases of investment in funds	(17)	(84)
Redemptions of investments in funds	547	7
Cash flows arising from investment in associate	-	7
Net purchases and sales of property and equipment	(10)	(12)
Change in securities lending collateral	18	12
Net cash flows used in investing activities	(939)	(74)

Cash flows provided by/(used in) financing activities
Net proceeds from Rights Issue	289	-
Dividends paid on common stock	(115)	(125)
Dividends paid on preferred stock	(44)	(44)
Change in securities lending collateral payable	(18)	(12)
Purchase of treasury stock	(8)	(50)
Net cash flows provided by/(used in) financing activities	104	(231)
Net increase in cash and cash equivalents	41	613
Effect of exchange rate changes	104	(314)
Cash and cash equivalents - beginning of year	2,355	2,056
Cash and cash equivalents - end of year	$2,500	$2,355

Supplemental cash flow information
Taxes (received)/paid	$6	$(9)
Interest paid	$5	$7

Cash and cash equivalents comprise the following:
Cash at bank and in hand	$2,023	$2,028
Cash equivalents	$477	$327

Notes to the Consolidated Financial Statements

For the years ended 31 December 2009 and 2008

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:

· Catlin Syndicate, which operates at Lloyd's of London;

· Catlin Bermuda (Catlin Insurance Company Ltd.);

· Catlin UK (Catlin Insurance Company (UK) Ltd); and

· Catlin US, which is the trading name for the Company's various subsidiaries in the United States. Catlin US includes Catlin Inc. as well as two insurance companies: Catlin Insurance Company Inc. and Catlin Specialty Insurance Company Inc.

As at 31 December 2009, the Group operates through underwriting hubs in London, Bermuda, United States, Asia-Pacific, Europe and Canada. The Group currently has 47 offices in 20 countries.

The Group writes a broad range of product groups, 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. Business is written from many countries, although business from the United States predominates.

Rights Issue

In March 2009, the Group completed a Rights Issue of 2 new common shares for every 5 existing common shares. Proceeds, after issue costs, were $289 million (£200 million). Further details are given in Note 13.

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 and actuarial determinations 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.

Certain insignificant reclassifications have been made to prior year amounts to conform to the 2009 presentation. There is no impact on net income or stockholders' equity.

Principles of consolidation

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

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. Gains and losses resulting from changes in fair value 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 9 are determined by management using internal models based on the valuation of the underlying notes issued by the counterparty. The determination of the fair values takes into account changes in the market for catastrophic reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date.

The fair values of option contracts and equity index futures contracts described in Note 9 are based on prices provided by independent pricing services. Any open contracts at the balance sheet date are included in investments in funds in the Consolidated Balance Sheets. 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 9 are based on prices provided by independent pricing services. Gains and losses on foreign exchange derivatives are included in net realised gains/(losses) on foreign currency exchange 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 the net income in the current year.

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 obligation to its insureds. Reinsurance premiums ceded and commissions thereon are recognised over the period that the reinsurance coverage is provided.

Reinstatement premiums payable are recorded and fully expensed as they fall due. Reinsurers' share of unearned premiums represents the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force.

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

Contract deposits

Contracts written by the Group which are not deemed to transfer significant underwriting and/or timing risk are accounted for as contract deposits and are included in premiums and other receivables. Liabilities are initially recorded at an amount equal to the assets received and are included in accounts payable and other liabilities in the Consolidated Balance Sheets.

The Group uses the risk-free rate of return of equivalent duration to the liabilities in determining risk transfer and records the transactions using the interest method. The Group periodically reassesses the estimated ultimate liability. Any changes to this liability are reflected as an adjustment to interest expense to reflect the cumulative effect of the period the contract has been in force and by an adjustment to the future internal rate of return of the liability over the remaining estimated contract term.

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 change in 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 period. 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 revalued at period-end rates of exchange, with the resulting gains and losses included in income. Revenues and expenses denominated in foreign currencies are translated at average rates of exchange for the period.

Income taxes

Income taxes have been provided for those operations that are subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Group's assets and liabilities. Such temporary differences are primarily due to the recognition of untaxed profits and intangible assets arising from the acquisition of Wellington 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 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 March 2008 the Financial Accounting Standards Board ('FASB') issued a new accounting standard on disclosures about derivative instruments and hedging activities. The accounting standard establishes the disclosure requirements for derivative instruments and for hedging activities. The standard requires expanded disclosure of how and why an entity uses derivative instruments, how derivatives and related hedged items are accounted for and how derivatives and related hedged items affect an entity's financial position, financial performance and cash flows. The Group adopted the new accounting standard in 2009.

Effective 1 January 2009, the Group adopted a FASB amendment to the existing accounting standard on fair value measurements and disclosures relating to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The amendment also includes guidance on identifying circumstances that indicate a transaction is not orderly and amends certain disclosure guidance. The amendment is effective for interim and annual periods ending after 15 June 2009. The adoption of the amendment did not have a material impact on the Group's financial position or results of operations.

Effective 1 January 2009, the Group adopted FASB amendments to accounting standards on fair value measurements and disclosures relating to fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consisted with the measurement principles of accounting standards for investment companies as of the reporting entity's measurement date. The amendments also require disclosures by major category of investment about the attributes of investments within the scope of the amendments, such as the nature of any restrictions on the investor's ability to redeem its investment at the measurement date, any unfunded commitments, and the investment strategies of investees. The amendments are effective for interim and annual periods ending after 15 December 2009. The adoption of the amendments did not have a material impact on the Group's financial position or results of operations.

In June 2009 the FASB issued the FASB Accounting Standards Codification (Codification). The Codification became the single source for all authoritative GAAP recognized by the FASB applied for financial statements issued for periods ending after 15 September 2009. The Codification did not change GAAP and did not have an impact on the Group's financial position or results of operations.

In 2009, the Group adopted amendments to accounting guidance on the following topics, none of which had a material impact on the Group's financial position or results of operations: business combinations; accounting for financial guarantee insurance contracts; employers' accounting for defined benefit pension and other postretirement plans; non controlling interests in consolidated financial statements; recognition and presentation of other-than-temporary impairments; and subsequent events.

3 Segmental information

The Group determines its reportable segments consistent with the manner in which results are reviewed by management. The four reportable segments are:

· Catlin Syndicate, which comprises direct insurance and reinsurance business underwritten by the Catlin Group's syndicates at Lloyd's of London ('Lloyd's');

· Catlin Bermuda, which primarily underwrites reinsurance business, including intra-Group reinsurance;

· Catlin UK, which primarily underwrites direct insurance; and

· Catlin US, which primarily underwrites direct insurance and reinsurance business in the United States.

At 31 December 2009, there were five significant intra-Group reinsurance contracts in place: a 45 per cent Corporate 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 4.9 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 86 per cent from Catlin Syndicate to Catlin Bermuda; and also two 75 per cent Quota Share contracts which cede Catlin US risk to Catlin Bermuda. The effects of each of these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

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

(US dollars in millions)	Catlin Syndicate	Catlin Bermuda	Catlin UK	Catlin US	Total
Gross premiums written	$2,496	$421	$469	$329	$3,715
Reinsurance premiums ceded	(353)	(50)	(72)	(72)	(547)
Net premiums written	2,143	371	397	257	3,168
Net premiums earned	2,001	348	384	185	2,918
Losses and loss expenses	(1,079)	(150)	(331)	(121)	(1,681)
Policy acquisition costs	(392)	(76)	(84)	(34)	(586)
Net underwriting contribution	$530	$122	$(31)	$30	$651

Net underwriting contribution by operating segment for the year ended 31 December 2008 is as follows:

(US dollars in millions)	Catlin Syndicate	Catlin Bermuda	Catlin UK	Catlin US	Total
Gross premiums written	$2,416	$392	$487	$142	$3,437
Reinsurance premiums ceded	(683)	(61)	(62)	(20)	(826)
Net premiums written	1,733	331	425	122	2,611
Net premiums earned	1,793	304	407	92	2,596
Losses and loss expenses	(1,098)	(159)	(311)	(64)	(1,632)
Policy acquisition costs	(339)	(63)	(88)	(20)	(510)
Net underwriting contribution	$356	$82	$8	$8	$454

Of total revenue as reported in the Group's Consolidated Statements of Operations, only net premiums earned are measured and managed on a segmental basis.

Assets are reviewed in total by management for the purposes of decision making.

4 Investments

Fixed maturities

The fair values of fixed maturities at 31 December 2009 and 2008 are as follows:

	2009	2008
(US dollars in millions)	Fair value	Fair value
US government and agencies	$745	$673
Non-US governments	836	394
Corporate securities	1,243	763
Asset-backed securities	260	257
Mortgage-backed securities	783	621
Total fixed maturities	$3,867	$2,708

$409 million (2008: $273 million) of the total mortgage-backed securities at 31 December 2009 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:

		2009		2008
(US dollars in millions)	Fair value	%	Fair value	%
US government and agencies	$745	19	$673	25
Non-US governments	836	22	394	15
AAA	1,254	32	1,103	41
AA	262	7	134	5
A	600	16	364	13
BBB and other	170	4	40	1
Total fixed maturities	$3,867	100	$2,708	100

The gross unrealised gains and losses related to fixed maturities at 31 December 2009 and 2008 are as follows:

	2009		2008
(US dollars in millions)	Gross Unrealised gains	Gross Unrealised losses	Gross Unrealised gains	Gross Unrealised losses
US government and agencies	$16	$3	$46	$2
Non-US governments	21	2	22	-
Corporate securities	34	4	15	28
Asset-backed securities	2	13	-	34
Mortgage-backed securities	14	69	9	134
Total fixed maturities	$87	$91	$92	$198

Fixed maturities at 31 December 2009, 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	$222
Due after one through five years	2,315
Due after five years through ten years	254
Due after ten years	33
	2,824
Asset-backed securities	260
Mortgage-backed securities	783
Total	$3,867

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 2009 and 2008.

Investments in funds

Investments in funds by category at 31 December 2009 and 2008 are as follows:

(US dollars in millions)	2009	2008
Equity funds	$-	$79
Internal fund of funds	358	433
Funds of funds	121	158
Bond fund	47	131
Equity market option contracts	4	-
Total investments in funds	$530	$801

At 31 December 2008 Catlin's investments in equity funds comprised two equity funds invested in a variety of equity securities with an objective to provide long-term return. Both funds were redeemed in 2009.

Internal fund of funds is an internally managed fund which comprises 16 individual hedge funds invested across a diversified set of managers, strategies and underlying asset classes including credit/distressed funds, multi-strategy funds and an activist fund with an objective to provide diversification of investment holdings.

Hedge funds within the internal fund of funds are subject to redemption terms which vary from 30 days' notice and monthly redemptions to 65 days' notice and 25 per cent of funds being redeemable each quarter. Of the 16 funds held at 31 December 2009, three funds valued at $51 million had a redemption date of 31 December 2009 and further redemption notices have been submitted for four funds with redemption valuation dates ranging from 1 January to 30 April 2010.

Additionally, within the internal fund of funds, one hedge fund, valued at $10 million is in the process of closing. The redemption proceeds will be received in instalments over a two year period. Another hedge fund, valued at $19 million is in the process of restructuring. Catlin submitted a redemption request in this fund and expects to receive the redemption proceeds over a two year period.

Funds of funds comprise two funds invested across a diversified set of managers, strategies and underlying asset classes including credit/distressed, credit/multi-strategy, equity hedged, multi-strategy, relative value and trading funds with an objective to provide diversification of investment holdings. At 31 December 2009 Catlin has submitted redemption notices for both funds of funds. The redemption proceeds of $121 million are expected to be received by February 2010.

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

There are no unfunded commitments related to investment in funds as at 31 December 2009.

Net investment return

The components of net investment return for the years ended 31 December 2009 and 2008 are as follows:

(US dollars in millions)	2009	2008
Interest income	$187	$233
Net gains/(losses) on fixed maturities and short-term investments	91	(111)
Net gains/(losses) on investments in funds	141	(212)
Investment in associate	-	5
Total investment return	419	(85)
Investment expenses	(5)	(6)
Net investment return	$414	$(91)

The Group has elected to apply the fair value option to its fixed maturities and short-term investments. In 2009, net gains of $91 million (2008: net losses of $111 million) were included in the Consolidated Statements of Operations in relation to changes in the fair values of these assets.

Gains in 2009 on fixed maturities and short-term investments still held at 31 December 2009 were $91 million. Gains in 2009 on investments in funds still held at 31 December 2009 were $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 ('LOC'), as described in Note 10. 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 2009 and 2008 is as follows:

(US dollars in millions)	2009	2008
Fixed maturities	$2,134	$1,566
Short-term investments	41	5
Cash and cash equivalents	567	350
Total restricted assets	$2,742	$1,921

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 $15 million (2008: $33 million) of securities on loan at 31 December 2009.

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 guideline on fair value measurements and disclosures hierarchy are described below.

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

Assets utilising Level 1 inputs comprise investments in equity funds 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 government and agency securities; non-US government obligations, corporate and municipal bonds, residential mortgage-backed securities ('RMBS'), commercial mortgage-backed securities ('CMBS') and asset-backed securities ('ABS') to the extent that they are not identified as Level 3 items; over-the-counter ('OTC') derivatives (e.g. foreign 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 and liabilities measured at fair value on a recurring basis

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

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

The table below shows the values at 31 December 2008 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 2008	Level 1 inputs	Level 2 inputs	Level 3 inputs
Assets
Fixed maturities	$2,708	$-	$2,671	$37
Short-term investments	69	-	69	-
Investments in funds	801	158	309	334
Catastrophe swaps	7	-	-	7
Total assets at fair value	$3,585	$158	$3,049	$378

Liabilities
Foreign exchange derivative contracts	$17	$-	$17	$-

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.

The changes in the year ended 31 December 2008 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

(US dollars in millions)	Total	Fixed maturities	Investments in funds	Catastrophe swaps (liabilities)/assets
Balance, 1 January 2008	$315	$82	$242	$(9)
Total net (losses)/gains included in income	(99)	(24)	(91)	16
Net (disposals)/purchases	13	(21)	34	-
Level 3 transfers in	152	-	152	-
Foreign exchange	(3)	-	(3)	-
Balance, 31 December 2008	$378	$37	$334	$7

Amount of net (losses)/gains relating to balances still held at year end	$(100)	$(25)	$(91)	$16

Fair value of financial instruments

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

Investments: Fair values of fixed maturities and short-term investments are based on the quoted market price of these securities provided by either independent pricing services, or, when such prices are not available, by reference to broker or underwriting bid indications. The fair value of investments in funds is based on either the net asset value provided by the funds' administrators, or where available, the quoted price of the funds.

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

Subordinated debt: Subordinated debt is not carried at fair value but at historical cost. At 31 December 2009, the fair value of the subordinated debt was $69 million which compared to a carrying value of $97 million. The fair value of the subordinated debt is estimated by comparing Catlin Bermuda's preferred stock and other peer group instruments to determine market required yields. Market required yields were used to estimate market value.

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

6 Investment in associate

On 2 September 2008, the Group, through Catlin Inc., one its US subsidiaries, sold its 25 per cent membership interest in Southern Risk Operations, L.L.C. ('SRO') which was accounted for using the equity method. The Group's share of the gain on sale was $5 million in 2008 and its share of the proceeds was $7 million. Under the terms of the sale, the Group may be entitled to further contingent consideration dependent on further thresholds being met in the next four years. In addition, the Group received cash distributions from SRO during the year ended 31 December 2008 of $1 million. The share of SRO's profit included within the Consolidated Statement of Operations during 2008 was $1 million.

7 Reserves for losses and loss expenses

The Group establishes reserves for losses and loss expenses, which are estimates of future payments of reported and unreported losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves is complex and imprecise, requiring the use of informed estimates and judgments. The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable, and would be reflected in earnings in the period in which the estimates are changed. Management believes that they have made a reasonable estimate of the level of reserves at 31 December 2009 and 2008.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2009 and 2008 is as follows:

(US dollars in millions)	2009	2008
Gross unpaid losses and loss expenses, beginning of year	$4,606	$4,237
Reinsurance recoverable on unpaid loss and loss expenses	(1,070)	(860)
Net unpaid losses and loss expenses, beginning of year	3,536	3,377
Net incurred losses and loss expenses for claims related to:
Current year	1,775	1,750
Prior years	(94)	(118)
Total net incurred losses and loss expenses	1,681	1,632
Net paid losses and loss expenses for claims related to:
Current year	(232)	60
Prior years	(1,305)	(1,211)
Total net paid losses and loss expenses	(1,537)	(1,151)
Foreign exchange and other	109	(326)
Loss portfolio transfer	431	4
Net unpaid losses and loss expenses, end of year	4,220	3,536
Reinsurance recoverable on unpaid losses and loss expenses	1,172	1,070
Gross unpaid losses and loss expenses, end of year	$5,392	$4,606

As a result of the changes in estimates of insured events in prior years, the 2009 reserves for losses and loss expenses net of reinsurance recoveries decreased by $94 million (2008: $118 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.

The Group's ultimate gross loss arising from 2008 Hurricane Ike is estimated to be $328 million (2008: $311 million) and its ultimate net loss is estimated to be $237 million (2008: $231 million) after reinsurance recoveries of $66 million (2008: $57 million) and net reinstatement premiums of $25 million (2008: $23 million). These amounts represent management's best estimate of the likely final losses to the Group from the 2008 hurricanes. In making this estimate, management has used the best information available, including estimates performed by the Group's underwriters, actuarial and claims staff, retained external actuaries, outside agencies and market studies. Allowance is made in the overall management best estimate of net unpaid losses for an appropriate level of sensitivity, for both individual large losses and the overall portfolio of business. In respect of the 2008 hurricanes, management have particularly considered sensitivities relating to gross losses on direct and reinsurance accounts, underlying loss experience of cedants and reinsurance coverage and security factors.

Loss portfolio transfer

As part of the purchase of Wellington 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. During the year, 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. To the extent that members maintain their interest from one year to the next, there is no economic effect arising from this transaction. However, where members' interests change from one underwriting year of account to the next, and the Group's share of the syndicate changes as a consequence, there is an economic transfer arising from the RITC.

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

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

In 2008, Syndicate 2020 closed the 2005 Lloyd's underwriting year of account by way of a Lloyd's reinsurance to close. In closing the 2005 year of account, all outstanding losses were transferred into the 2006 year of account. The Group had an additional ownership of approximately 0.59 per cent acquired from the external members in respect of the 2006 year of account, which resulted in an increase in loss reserves of $4 million; this has been treated as a loss portfolio transfer.

8 Reinsurance

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

		2009		2008
(US dollars in millions)	Premiums written	Premiums earned	Premiums written	Premiums earned
Direct	$2,586	$2,473	$2,467	$2,372
Assumed	1,129	1,094	970	936
Ceded	(547)	(649)	(826)	(712)
Net premiums	$3,168	$2,918	$2,611	$2,596

The Group's reinsurance recoverable as at 31 December 2009 and 2008 is as follows:

(US dollars in millions)	2009	2008
Gross reinsurance recoverable	$1,489	$1,260
Provision for uncollectible balances	(48)	(34)
Net reinsurance recoverable	$1,441	$1,226

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 2009, 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

16%

A+

Hannover Ruck-AG

9 Derivative financial instruments

Catastrophe swap agreements

Newton Re

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

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

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

The cat swap has not been triggered as at 31 December 2009.

Bay Haven

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

Valuation of Catastrophe Swap Agreements

The cat swaps are measured in the balance sheet at fair value with any changes in the fair value included in the Consolidated Statements of Operations. As at 31 December 2009, the fair value of the cat swaps is an asset of $1 million (2008: $7 million). As there is no liquid market in this derivative, the fair value is derived from indicative prices for the notes issued by the cat swap counterparties.

Options 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. A portion of the investment portfolio is invested in hedge funds and fund 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 for equity market options and futures contracts are included in net investment return 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 2009.

Foreign exchange contracts

During the period, the Group held various foreign currency derivatives (forward contracts, caps and collars) to manage currency risk. Gains and losses on foreign exchange contracts are included in net realised gains/(losses) on foreign currency exchange in the Consolidated Statements of Operations. At 31 December 2008 the Group held two forward contracts, both of which were closed in early 2009. No contracts were held at 31 December 2009.

Impact of derivatives

The fair values of derivatives at 31 December 2009 and 2008 are as follows:

		2009		2008
(US dollars in millions)	Assets	Liabilities	Assets	Liabilities
Equity market option contracts	4	-	-	-
Foreign exchange contracts	-	-	-	17
Catastrophe swaps	1	-	7	-
Total derivatives	5	-	7	17

The notional values of exchange traded and OTC open derivatives at 31 December 2009 and 2008 are as follows:

	Notional Value
(US dollars in millions)	2009	2008
Equity market option contracts	115	-
Foreign exchange contracts	-	115

The gains and losses on derivatives at 31 December 2009 and 2008 are as follows:

(US dollars in millions)	2009	2008
Equity market options contracts	(6)	-
Equity market futures contracts	(7)	-
	(13)	-
Foreign exchange contracts	4	(26)
Catastrophe swaps	(31)	(13)
Net losses on derivatives	(40)	(39)

The derivatives contracts held by Group at 31 December 2009 contain no credit-risk related contingent features.

10 Subordinated debt and financing arrangements

The Group's outstanding subordinated debt as at 31 December 2009 and 2008 consisted of the following:

(US dollars millions)	2009	2008
Variable rate, face amount €7, due 15 March 2035	$11	$10
Variable rate, face amount $27, due 15 March 2036	28	28
Variable rate, face amount $31, due 15 September 2036	32	33
Variable rate, face amount $10, due 15 September 2036	10	11
Variable rate, face amount €11, due 15 September 2036	16	16
Total subordinated debt	$97	$98

Subordinated debt

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.

Bank facilities

The Group participates in a Letter of Credit/Revolving Loan Facility (the 'Club Facility'), which includes seven banks. The Club Facility was most recently amended on 10 September 2008, when the credit available under the Club Facility was set at $600 million and £320 million. The amended Club Facility was composed of three tranches, the first of which, a 364-day, $100 million revolving facility ('Facility A') expired undrawn on 10 September 2009. The following amounts were outstanding under the Club Facility as at 31 December 2009:

· Clean, irrevocable standby LOCs of $518 million (£320 million) are available to support the Catlin Syndicate's underwriting at Lloyd's ('Facility B'). As at 31 December 2009 the Catlin Corporate Members and Catlin Syndicate have utilised Facility B and deposited with Lloyd's 13 LOCs which total the amount of $518 million (£320 million). In the event that the Catlin Syndicate fails to meet its obligations under policies of insurance written on its behalf, Lloyd's could draw down this letter of credit. These LOCs have an initial expiry date of 27 November 2013.

· A two-year $500 million standby LOC facility is available for utilisation by Catlin Bermuda and Catlin UK ('Facility C'). It is further split into two equal tranches of $250 million with the first being fully secured by OECD Government Bonds, US Agencies, Corporate and Asset Backed securities and or cash discounted at varying rates. The second tranche is unsecured. As at 31 December 2009 $263 million in LOCs were outstanding, of which $259 million were issued for the benefit of insureds and re-insureds of Catlin Bermuda, and $4 million (£2 million) issued for the benefit of an insured of Catlin UK. $137 million of the LOCs were issued on an unsecured basis. Facility C has an expiry date of 31 December 2010.

The terms of the Club Facility require that certain financial covenants be met on a quarterly basis as evidenced by the filing of Compliance Certificates. These include maximum levels of possible exposures to realistic disaster scenarios for the Group, as well as requirements to maintain minimum tangible net worth. The Group was in compliance with all covenants during 2009.

A second LOC Facility administered by Citibank on behalf of Lloyd's acting for the Lloyd's Syndicates had LOCs totalling $7 million outstanding at 31 December 2009.

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

11 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 2009 and 2008 consist of the following:

(US dollars in millions)	Goodwill	Indefinite life intangibles	Finite life intangibles	Total
Net value at 1 January 2008	$93	$782	$9	$884
Movements during 2008:
Foreign exchange revaluation	(23)	(207)	(1)	(231)
Amortisation charge	-	-	(2)	(2)
Total movements during 2008	(23)	(207)	(3)	(233)
Net value at 31 December 2008	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

Goodwill, syndicate capacity and admitted licenses are considered to have an indefinite life and as such are subject to annual impairment testing. Neither goodwill nor intangibles were considered impaired in 2009 or 2008.

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 and internally developed cash flow models. In 2009 and 2008, 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 2009 the gross carrying amount of finite life intangibles was $10 million (2008: $10 million) and accumulated amortisation was $6 million (2008: $4 million). Amortisation of intangible assets at current exchange rates will amount to approximately $2 million per annum for the next two years and nil thereafter.

12 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/(benefit) for the years ended 31 December 2009 and 2008 is as follows:

(US dollars in millions)	2009	2008
Current tax benefit	$(31)	$(41)
Deferred tax expense	81	31
Expense/(benefit) for income taxes	$50	$(10)

The effective tax rate for the Group is 8.3 per cent (2008: 76.9 per cent). A reconciliation of the difference between the expense/(benefit) for income taxes and the expected tax expense/(benefit) at the weighted average tax rate for the years ended 31 December 2009 and 2008 is provided below. The weighted average expected tax expense/(benefit) has been calculated using pre-tax accounting income/(loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

(US dollars in millions)	2009	2008
Expected tax expense/(benefit) at weighted average rate	$33	$(26)
Permanent differences:
Disallowed expenses	14	2
Valuation allowances	3	11
Prior year adjustments including changes in uncertain tax positions	-	3
Expense/(benefit) for income taxes	$50	$(10)

The components of the Group's net deferred tax liability as at 31 December 2009 and 2008 are as follows:

(US dollars in millions)	2009	2008
Deferred tax assets:
Net operating loss carry forwards	$170	$65
Stock options	-	4
Accelerated capital allowances	5	3
Syndicate capacity amortisation and other	3	1
Valuation allowance	(23)	(20)
Total deferred tax assets	$155	$53
Deferred tax liabilities:
Untaxed profits	(294)	(142)
Intangible assets arising on business combination	(95)	(87)
Total deferred tax liabilities	$(389)	$(229)
Net deferred tax liability	$(234)	$(176)

As at 31 December 2009, the Group has net operating loss carry forwards of $526 million (2008: $162 million) which are available to offset future taxable income. The net operating loss carry forwards primarily arise in the 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.

As at 31 December 2009 there are potential deferred tax assets of $23 million (2008: $20 million) in the US companies relating to 2009 calendar year losses, but a 100 per cent valuation allowance has been recognised in respect of the losses in both 2009 and 2008.

Uncertain tax benefits

As at 31 December 2009 the amount of uncertain tax benefits was $4 million (2008:$8 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)	2009	2008
Unrecognised tax benefits balance at 1 January	$8	$9
Gross decreases for tax positions of prior years	(4)	(1)
Unrecognised tax benefits balance at 31 December	$4	$8

The Group does not believe it would be subject to any penalties in any open tax years and has not accrued any such amounts. The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements. The Group did not pay or accrue any interest or penalties in 2009 or 2008 relating to uncertain tax positions.

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

Major tax jurisdiction	Years
United Kingdom	2008-2009
United States	2006-2009

13 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2009 and 2008:

	2009	2008
Common stock, par value $0.01
Authorised	500,000,000	400,000,000

Issued	358,895,225	255,162,926
Stock held by Employee Benefit Trust	(8,772,686)	(6,725,149)
Outstanding	350,122,539	248,437,777

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 2009 and 2008:

	2009	2008
Balance, 1 January	255,162,926	253,122,072
Rights Issue	102,068,050	-
Exercise of stock options and warrants	1,664,249	2,040,854
Balance, 31 December	358,895,225	255,162,926

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. In 2008 the Group 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 2009, the Group, through the EBT, purchased 2,303,570 of the Group's stock at an average of $4.71 (£2.91) per unit, inclusive of 846,970 under the terms of the Rights Issue. The average price of the Group's stock purchased, excluding stock related to the Rights Issue, was $5.52 (£3.41). The total amount paid for treasury stock of $8 million was deducted from the stockholders' equity. The cumulative cost of shares purchased through the EBT of $62 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 share of $4.37 (2008: $5). During 2009,warrants increased by 869,456 in relation to the Rights Issue. No warrants were exercised in the year leaving 6,907,342 warrants outstanding at 31 December 2009. During 2008, 2,942,796 warrants to purchase common stock were exercised and settled net for 1,060,547 shares of common stock, leaving 6,037,886 warrants outstanding at 31 December 2008.

Dividends

Dividends on common stock

On 15 May 2009 the Group paid a final dividend on the common stock relating to the 2008 financial year of $0.266 (£0.18) per share to stockholders of record at the close of business on 20 February 2009. The total dividend paid for the 2008 financial year was $0.434 (£0.266) per share.

After adjusting for the bonus element included in the 2009 Rights Issue, the final dividend on the common stock relating to the 2008 financial year is equivalent to $0.232 (£0.157) per share, and the total dividend paid for the 2008 financial year is equivalent to $0.379 (£0.232) per share.

On 25 September 2009 the Group paid an interim dividend relating to the 2009 financial year of $0.138 per share (£0.082 per share) to stockholders of record as at 28 August 2009.

Dividends on preferred stock

On both 19 January and 19 July 2009, the Board of Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

14 Employee stock compensation schemes

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

The total amount expensed to income in respect of all plans in the year ended 31 December 2009 was $22 million (2008: credit of $2 million) included in administrative and other expenses. Remaining stock compensation to be expensed in future periods relating to these plans is $27 million. 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 12 February 2009 a total of 5,071,892 options with $nil exercise price and 2,129,954 non-vested shares (total of 7,201,846 securities) were awarded to Group employees under the PSP. In August and September 2009 a further 237,296 options with $nil exercise price and 98,136 non-vested shares (total of 335,432 securities) were awarded, resulting in a total of 7,537,278 securities granted to Group employees under the PSP in 2009. Up to half of the securities will vest in 2012 and up to half will vest in 2013, 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 7 per cent for grants made in 2009, 8 per cent for grants made in 2008, 8 per cent for grants made in 2007 and 4 per cent for grants made in 2006. This initial valuation is revised at each balance sheet date to take account of actual achievement of the performance condition that governs the level of vesting and any changes that may be required to the attrition assumption. The difference is charged or credited to the income statement, with a corresponding adjustment to equity. 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 2009 was 16,886,199 (2008: 11,473,623) and the total amount of expense relating to PSP for the year ended 31 December 2009 was $22 million (2008: credit of $2 million).

The weighted average grant date fair value of the options awarded in 2009 is $5.18 and the total fair value of shares vested during the year is $9 million (2008: $9 million).

The table below shows the PSP securities as at 31 December 2009:

	Outstanding	Non-vested	Vested
Beginning of year	11,473,623	11,238,153	235,470
Rights Issue effect	1,662,402	1,628,285	34,117
Granted during year	7,537,278	7,537,278	-
Vested during the year	(669,136)	(2,472,894)	1,803,758
Forfeited during year	(1,538,666)	(1,538,666)	-
Exercised during the year	(1,579,302)	-	(1,579,302)
End of year	16,886,199	16,392,156	494,043
Exercisable, end of year	494,043	-	494,043

In addition, at each dividend payment date, an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting), is paid into the EBT. This amount, totalling $5 million in 2009 (2008: $4 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 2009 and 2008. All options will expire by 4 July 2012. As at 31 December 2009 there were 5,024,187 (2008: 4,454,882) options outstanding with an exercise price of $4.37 (2008: $5.00) and 204,334 (2008: 178,493) options outstanding with an exercise price of £3.06 (2008: £3.50). As a result of the Rights Issue, the number of options and the exercise price were adjusted in 2009.

15 Earnings per share

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

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

(i) PSP;

(ii) LTIP;

(iii) Warrants;

(iv) and Employee share plans.

Income/(loss) to common stockholders is arrived at after deducting preferred share dividends of $44 million (2008: $44 million).

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

	2009	2008
Weighted average number of shares	333,739,594	286,038,588
Dilution effect of warrants	1,047,080	-
Dilution effect of stock options and non-vested shares	10,889,601	-
Weighted average number of shares on a diluted basis	345,676,275	286,038,588

Earnings/(loss) per common share
Basic	$1.52	$(0.16)
Diluted	$1.47	$(0.16)

In 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 2009.

Potentially issuable securities that would result in a reduction in loss per share if issued are not considered to have a dilution effect. In 2008 due to the loss incurred, no potentially issuable securities were considered dilutive. As a result, there was no difference between basic and diluted amounts.

As described in Note 13, the Company issued new common shares by way of a Rights Issue of 2 new common shares for every 5 existing common shares. The impact of the bonus element included within the Rights Issue has been reflected in the calculations of the basic and diluted earnings per share for the period and prior periods have been re-presented on this basis.

16 Other comprehensive loss

The following table details the individual components of other comprehensive loss for 2009 and 2008:

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

2008 (US dollars in millions)	Amount before tax	Tax benefit/ (expense)	Amount after tax
Cumulative effect of adoption of the fair value option	$(20)	$6	$(14)
Defined benefit pension plan	1	-	1
Cumulative translation adjustments	(307)	(19)	(326)
Change in accumulated other comprehensive loss	$(326)	$(13)	$(339)

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

(US dollars in millions)	2009	2008
Cumulative translation adjustments	$(189)	$(301)
Funded status of defined benefit pension plan adjustment	-	-
Accumulated other comprehensive loss	$(189)	$(301)

17 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 $9 million for the year ended 31 December 2009 (2008: $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 $2 million for the year ended 31 December 2009 (2008: $1 million).

In the US, Catlin Inc. has adopted a 401(k) Profit Sharing Plan ('the Plan') qualified under the Internal Revenue Code and a Non-Qualified Deferred Compensation Plan under which Catlin Inc. contributes a specified percentage of each employee's earnings. The pension cost for the US scheme was $5 million for the year ended 31 December 2009 (2008: $6 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 2009 were $27 million (2008: $20 million) and fair value of plan assets was $28 million (2008: 21 million). The pension costs for the defined benefit scheme were insignificant for the years ended 31 December 2009 and 2008.

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

18 Statutory financial data

The statutory capital and surplus of each of the Group's principal operating subsidiaries is in excess of regulatory requirements of $995 million (2008: $856 million). The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,222 million (2008: $1,005 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.

19 Commitments and contingencies

Legal proceedings

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

Concentrations of credit risk

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

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

Letters of credit

The Group provides finance under its Club Facility to enable its subsidiaries to continue trading and to meet its liabilities as they fall due, as described in Note 10.

Future lease commitments

The Group leases office space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2009 are as follows:

(US dollars in millions)

2010	$14
2011	$14
2012	$13
2013	$17
2014 and thereafter	$122
Total	$180

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $11 million (2008: $14 million).

20 Related parties

The Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2009 and 2008 was insignificant.

The Group purchased services from 4C Associates Ltd, the owner of which is related to a member of management of the Group. The cost of the services purchased from 4C Associates Ltd in 2009 was insignificant (2008: $nil).

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

21 Subsequent events

Proposed dividend

On 10 February 2010 the Board approved a proposed final dividend of 16.8 pence per share (26.2 cents per share) payable on 26 March 2010 to stockholders of record at the close of business on 26 February 2010. The final dividend is determined in US dollars but partially payable in sterling based on the exchange rate of £1 = $1.56 on 10 February 2010.

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 2010.

Management has evaluated subsequent events until 10 February 2010, the date of issuance of the financial statements.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR SFAFUSFSSEDE

Castelnau Group Limited (CGL)

Thursday, 21st November 2024

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