Annual Financial Report

RNS Number : 0982Q

Catlin Group Limited

03 April 2009

 



Catlin Group Limited 

3 April 2009 

Annual Financial Report and associated documentation

Copies of the following documents have been submitted to the UK Listing 

Authority: 

 1. Annual Report and Accounts 2008; 

 2. Notice of Annual General Meeting to be held on 7 May 2009; and 

 3. Form of Proxy. 

These will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility at: 

Financial Services Authority 

25 The North Colonnade 

Canary Wharf 

London E14 4HS 

A PDF version of the Annual Report and Accounts and the Notice of Annual General Meeting will be available shortly for viewing on the Catlin Group Limited website, www.catlin.com. 

The Notice of Annual General Meeting includes a resolution to adopt new Bye-Laws. Copies of the new Bye-Laws have been forwarded to the Financial Services Authority in accordance with Disclosure and Transparency Rule ('DTR') 6.1.2. A summary of the principal alterations to the existing Bye-Laws, together with a copy of the proposed new Bye-Laws are set out in the Notice of Annual General Meeting. 

In accordance with DTR 6.3.5 (2) (b), a description of principal risks and a responsibility statement are set out below in full unedited text, both as extracted from the Annual Report and Accounts 2008. Catlin Group Limited's ('Company') consolidated financial statements for 2008, which includes details of related part transactions, together with a description of important events during 2008 were appended to the Company's Financial Results announcement published on 12 February 2009. 

Pages references below refer to page numbers in the Annual Report and Account.

1. Risk Management

A comprehensive risk management programme has been established across the Group

Catlin has established a formal risk management programme to analyse its risk profile and adopt appropriate risk mitigation strategies. Through the Group's risk management programme, risk identification, assessments and control reviews are updated and refreshed regularly to ensure that risk management adapts to changing conditions and that risk mitigation is continuously strengthened.

The risk management programme is supervised by the Chief Risk Officer ('CRO') who provides guidance and support for risk management practices across the Group, its operating platforms and its various departments. The CRO reports to the Group's Chief Executive and to the Catlin Group Board and its Audit Committee. Responsibility for risk management is spread throughout the organisation. The Group Executive Committee ('GEC'), which comprises the two Executive Directors and other senior managers, meets monthly and considers risk management issues at those meetings. Furthermore, responsibility for risk management is embedded in the operational responsibilities of each manager. The CRO works with the Group Chief Actuary on risk-based capital modelling and with the Chief Compliance Officer and the Head of Internal Audit on risk-based audit planning and compliance reviews.

The Chief Executive of each of the Group's four underwriting platforms is responsible for developing and executing a strategy and business plan, subject to the approval of the GEC, the Group's Board of Directors and the platform's own Board. In managing an underwriting platform's operations, the Chief Executive is responsible for identifying and managing the risks to the platform's objectives. The platform CEO is charged with establishing and ensuring compliance with appropriate policy, procedures and other controls that reflect Group policy and procedures and with all applicable external regulatory requirements.

Risk management framework

Under the direction of the CRO, the Group conducts a formal risk assessment process within each of its underwriting platforms. The risks are identified and the effectiveness of the controls is assessed by management and reviewed by the CRO and the risk team. The risk and control assessments are updated periodically.

The risk team works together with the GEC and actuarial staff to review and assess the residual risk remaining following the application of the mitigating controls. The team uses various models including sophisticated stochastic modelling to quantify the capital needed to support Catlin Group's risk within the risk appetite determined by the Board. They further evaluate capital requirements through stress and scenario tests. The results of this modelling are included in the reports to the Group's Board of Directors as part of the annual planning discussions. Each platform prepares a formal document annually that details the platform's risk governance, policies and controls, risk assessment, capital requirements and other aspects of a comprehensive risk management programme.

Management of insurance risk

Insurance risk includes the risks of inappropriate underwriting, inadequate pricing and ineffective management of underwriting delegated to third parties. In recent years, Catlin has expanded its network of international offices, including locations in North America, South America, Europe, Asia and Australia. This international expansion has increased the inherent risk of underwriting errors or mismanagement. The competitive pressures on pricing and underwriting actions for some classes of business can be intense. To manage this risk, the Group pays particular attention to the underwriting control framework. The Group Underwriting Board and the underwriting committee of each operating platform are responsible for overseeing the Group's underwriting operations. The Group Underwriting Board is led by the Group's Chief Underwriting Officer and includes the heads of underwriting of the four platforms as well as senior underwriting managers with Group-wide responsibilities. The Group Underwriting Board and the GEC develop an annual underwriting plan for the consideration of and approval by the Group Board of Directors and the boards of each underwriting platform. The Group Underwriting Board and the GEC monitor and report on the performance against that plan on a quarterly basis by platform and by class of business. The platform underwriting committees conduct monthly reviews of underwriting results. Underwriting is conducted in accordance with a number of technical analytic protocols set by the Group Underwriting Board and is supported by pricing models. This includes defined underwriting authorities, guidelines by class of business, rate monitoring and underwriting peer reviews. 

Binding authority arrangements are an important part of Catlin's business and present a distinct set of operational risks. Catlin has established dedicated binder management teams in London and the United States. The teams oversee pre-appointment reviews and ongoing annual reviews, including periodic on-site third-party audits (see page 51). Underwriting performance is monitored by both individual underwriters and the binder management teams.

Insurance risk includes the risk of inadequate controls around aggregating exposures to catastrophic events.

Catlin's diversified underwriting portfolio includes a material segment that is exposed to loss from catastrophic events that might impact numerous customers. The inherent risk of a large aggregation of such losses poses one of the most substantial exposures to the Group. Catlin management has put in place a robust control structure to mitigate and transfer this risk.

Catlin utilises the RMS™ and EQECAT risk models in respect of certain natural catastrophe exposures alongside its own internal catastrophe models. Modelling is done as part of the underwriting and pricing of individual accounts that present significant catastrophe exposure. Aggregate exposure is also extensively modelled and tested against severe threat scenarios to ensure conformance with Group risk appetite and alignment with reinsurance programmes and underwriting strategies. The Group actively monitors risk correlation by type of exposure and by geographic region.

The risk is further protected by a reinsurance programme that responds to an array of possible catastrophic events. The Company has made use of catastrophe bonds to transfer some of the risk.

Insurance risk includes the risk of inappropriate claim management and ineffective control over claim authority delegated to third parties.

The Group Head of Claims directs claims operations across the Group. Claims policies and procedures include defined authority levels, protocols for management oversight, an automated system to support and report on all major claims activity, and a formal review process for major claims. Internal and, if appropriate, third-party reviews of claims operations are conducted to ensure that the control framework is effective.

Insurance risk includes the risk of inadequate reserves for losses including losses that have been incurred but not reported (IBNR).

Reserves for unpaid losses are the largest single component of the liabilities of the Group. Loss reserve estimates are inherently uncertain. Actual losses that differ from the provisions, or revisions in the estimates, can have a material impact on future earnings and the balance sheet.

Catlin has a large team of experienced actuaries working closely with the underwriting and claims staff within each of the operating platforms to ensure understanding of the Group's exposures and loss experience. The Group Head of Reserving oversees Catlin's reserving processes. In addition, the Group receives independent external analyses of its reserve requirements annually.

Underwriting, claims, and actuarial operations and controls all depend on systems and data. There is the risk that these systems and data may not be reliable.

Underwriting and claims systems, procedures and data management are supported and monitored by Group Operations and Group IT teams, both of which report to the Group Chief Operating Officer. The Group Chief Underwriting Officer, the Group Head of Claims and the Group Chief Actuary are each responsible for identifying the risks to their respective operations, including systems and data risks, and for ensuring that the Group is capable of managing those risks.

Management of investment market risk 

Key investment risks to the Group relate to inappropriate strategy, misalignment with Group risk appetite and achievement of appropriate diversification. These risks might crystallise as financial loss or insufficient risk adjusted returns.

All Catlin Group and subsidiary assets are managed by the Group Chief Investment Officer, under the direction of the Group Chief Executive and the Investment Committee of the Board of Directors. The Board - through the Investment Committee - reviews and approves on a regular basis the investment strategy proposed by the Chief Investment Officer.

The Group's financial results are affected by realised and unrealised gains and losses arising from movements in market valuations of its invested assets which include fixed income instruments as well as a limited allocation to alternative investments and equity funds. There is the risk of volatility in reported earnings and stockholders' equity arising from instability in the financial markets.

Regular modelling is performed to test the structure, performance and liquidity of the investment portfolio in scenarios that include an extreme insurance event coupled with investment losses.

Before a decision is made to contract with an investment manager or invest in a fund, comprehensive due diligence and analysis is carried out by an in-house team, assisted by external professionals where appropriate. Hedge fund managers are reviewed by an independent third-party specialist.

To ensure that the portfolio is appropriately diversified, the Group monitors asset allocation by manager and asset class. The Group on a monthly basis monitors the performance of each fixed income investment manager and of the investments in equity and hedge funds. The Group performs on-site visits of all fund managers. Each fixed income manager is given written investment guidelines against which fund activity is monitored. The guidelines are reviewed regularly to ensure their appropriateness, with revisions made as required.

Management of liquidity risk and currency risk

The Group continually monitors its cash and investments to ensure that the Group meets its liquidity requirements. The Group's asset allocation is designed to enable insurance liabilities to be met with current assets. While some longer term assets might from time to time have reduced market valuations, Catlin expects to be able to hold these assets to recovery and it is therefore not expected that those losses will be realised. The Group sets minimum liquidity requirements; liquidity levels at 31 December 2008 were significantly higher than the minimum required.

The Group Treasurer monitors cash flow and manages liquid assets and debt facilities. The Group Treasurer, together with the platform financial officers, is responsible for ensuring that sufficient liquid investments are available as required by the Group and its operating platforms. The Group Treasurer is also responsible for ensuring that cash is not overly concentrated with any one entity.

The Group has put in place a banking facility to ensure the availability of credit that might be required from time to time and to support letter of credit (LOC) requirements, particularly related to its operations at Lloyd's of London and reinsurance of US clients. There is the risk that this facility might not be reliable or otherwise unavailable for renewal.

The Group's current facility is in place through 2010. It is placed with a consortium of seven banks. The relationship with these banks is managed by the Group Treasurer with oversight by the GEC and the Group Chief Financial Officer. Where Catlin has made certain covenants related to banking relationships, management plays close attention to monitor and avoid any potential breaches.

The Group conducts business in a number of different currencies, predominantly US dollars, sterling and euros. While the Group's reporting currency is the US dollar, some of the Group's operating subsidiaries report in other currencies. There is the risk of gains and losses arising from transactions in currencies that are different from the reporting currency. There is also the reporting risk of gains and losses arising from the effect of consolidating all valuations to US dollars as well as the possible mismatch of the currency for assets and related liabilities.

The Group Treasurer, together with the platform financial officers, considers the Group's currency requirements and the risks arising from foreign exchange fluctuations. Each quarter, the actual cash and invested assets are compared with the projected ultimate loss liabilities net of premiums due and reinsurance recoverables by currency. Any shortfall by currency is addressed. Two separate holding companies are in place in Bermuda to manage exchange risk arising from the holding of sterling and euros.

Management of credit risk

The Group is exposed to credit risk primarily from unpaid reinsurance recoveries and from fixed income instruments in the investment portfolio.

The risk of recovering reinsurance is managed by the Group Chief Financial Officer who chairs a Reinsurance Security Committee. This committee establishes security standards applicable to all reinsurance purchases and monitors the financial status of all reinsurance debtors. This committee also reviews and approves all non-traditional risk transfers.

Credit risk arising from fixed income instruments is managed by the Group Chief Investment Officer. The professional fund managers are given guidelines regarding minimum quality of investment instruments to be purchased. Reinsurers and fixed income instruments are monitored for the occurrence of a downgrade or other changes that might cause them to fall below Catlin's security standards. If this occurs, management takes appropriate action to mitigate any loss to the Group.

Management of operational risk

The Group is exposed to operational risk through its relationships with key counterparties. The Group Treasurer is responsible for monitoring and managing banking relationships, including the potential for over-concentration. The Chief Investment Officer is responsible for managing any issues relating to fund managers and investment advisors.

The Chief Operating Officer manages the risk of rating agency downgrade by maintaining a high level of communication with key rating agencies.

IT system risk and data quality are two of the major elements in operational risk. The Group has taken major steps to upgrade its financial reporting processes to meet the needs of a larger, more geographically dispersed organisation and to comply with accelerated reporting timetables starting with the 2008 interim results.

The Group Chief Operating Officer, together with the GEC, is responsible for all IT operations and also directs an Operations team that supports process improvement and controls throughout the Group.

The Chief Executive Officer of each underwriting platform and Group heads of function, in conjunction with the GEC, are responsible for managing operational risk. Each CEO is required to establish and adhere to appropriate operational policies and procedures.

Summary of high-level controls

The Group's Board of Directors has adopted a number of controls to ensure the satisfactory operations of the Catlin Group. The Board receives financial reports on a monthly basis and more detailed financial data in advance of each Board meeting. These financial reports are reviewed by the Audit Committee. Accounting policy is approved by the Board through the Audit Committee.

In advance of each of its meetings, the Board receives reports from the Chief Executive, Chief Underwriting Officer, Chief Operating Officer, Chief Financial Officer, Chief Investment Officer, Chief Risk Officer and the General Counsel regarding current operations and on any areas of high risk.

The Board meets annually with the Group's management to conduct an in-depth review of the annual business plan and to assess the risks embedded in the plan. New initiatives and other major projects are presented and discussed. Each year, the internal audit team assesses the effectiveness of the Group's control framework and reports to the Board.

The Audit Committee and the full Board receive reports from the outside auditors, internal auditors and the external actuaries at least once a year. The Audit Committee also regularly meets those parties in private sessions, at which management and Executive Directors are not present. Through its Compensation Committee, the Board reviews human resources policy and the remuneration of senior staff.

Risk-based capital

Catlin has been developing risk-based capital requirements from detailed stochastic models since 2004. In 2006, the modelling was peer-reviewed by an independent actuarial firm with extensive experience in the field. The firm found Catlin's modelling process to be at the sophisticated end of that found within the insurance market.

The output of the model is reviewed by the GEC and is used by the Group in numerous ways. The Group's capital planning relies upon the risk-based capital analysis of business mix and growth strategies. Risk-based profit requirements have been identified for individual underwriting classes based on modelled volatility, exposure to extreme threat events, and correlation with other classes and other risk categories. Pricing targets are set based on that work. The evaluation of new business initiatives includes risk-based capital requirements and correlations with the existing business. The capital model provides detailed analysis of the uncertainty of claim estimates. Alternative reinsurance programmes, including catastrophe bonds, are modelled for their impact on the risk-based capital requirements. The volatility of the investment portfolio is explicitly considered within the capital model.

Regulators and rating agencies are increasingly taking into account an insurer's enterprise risk management ('ERM') programme, including the assessment of risk-based capital. Catlin's strategy is to maintain an ERM programme which brings together risk-based capital analysis and strategic and operational processes. The Group anticipates that this strategy will satisfy developing risk management and related capital requirements from rating agencies and regulators worldwide.

Assurance

The Group Head of Internal Audit directs an internal audit programme across all Group operations and subsidiaries. The programme is designed to provide management and the Board, through its Audit Committee, with reasonable assurance that the Group's controls and procedures are able to contain risks within acceptable limits.

From time to time, the Group obtains assurance from independent third-party specialists on selected key operations. For example, an independent claim quality review is conducted at least annually. Actuarial reserving is reviewed annually by an independent actuarial firm. In compliance with industry standards, the effectiveness of the internal audit function was recently assessed by an independent reviewer. The Group's capital modelling work has also been reviewed by an independent firm.

2. Directors' Responsibility Statement pursuant to DTR 4

The Annual Report contains the following responsibility statement. The names and functions of the Company's Directors are listed below.

The Directors confirm that, to the best of their knowledge:

• the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

• the management report incorporated into the Business Review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Directors of the Company

Name	Function
Sir Graham Hearne	Chairman
Stephen Catlin	Chief Executive and Deputy Chairman
Christopher Stooke	Chief Financial Officer
Alan Bossin	Non-Executive Director
Michael Crall	Non-Executive Director
Michael Eisenson	Non-Executive Director
Kenneth Goldstein	Non-Executive Director
Michael Harper	Senior Independent Non-Executive Director
Michael Hepher	Non-Executive Director
Nicholas Lyons	Non-Executive Director

 

END

 

 

ACSSSISUDSUSEIL