Annual Financial Report

RNS Number : 0842I

Catlin Group Limited

20 March 2015

 



20 March 2015

Catlin Group Limited

Annual Financial Report

The following document has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do:

·      Annual Report and Accounts 2014

A PDF version of the document will also be available for viewing on the Catlin Group Limited website, www.catlin.co.uk.

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 2014.  Catlin Group Limited's (the "Company") consolidated financial statements for 2014, which include details of related party transactions, together with a description of important events during 2014, were appended to the Company's Financial Results announcement published on 10 February 2015.

Risk Management  

Catlin's robust risk management and control framework is designed to address all of the Group's material risks. The Group framework is supported by risk and control frameworks developed for each of the underwriting hubs.

Catlin's strategy for managing insurance and financial markets risks includes:

•      analysing and assessing insurance risks with high-quality underwriting, actuarial and claims expertise;

•      analysing and selecting high-quality investment options with experienced asset managers;

•      diversifying insurance and investment risks through active portfolio management and risk modelling;

•      transferring risk through cost-effective risk transfer programmes;

•      retaining risk within an approved risk appetite with appropriate levels of capital; and

•      continuously monitoring for emerging changes affecting risk.

The Group's strategy for managing other business and operational risks includes:

•      identifying and analysing risk through a disciplined risk assessment process;

•      mitigating or avoiding risks that do not fit business objectives; and

•      training and development of staff regarding Catlin's risk management culture.

Group Board of Directors

The Group Board of Directors is responsible for the overall internal control framework for the Group, including setting and approving business strategy and direction for the Group and its underwriting hubs, as well as determining risk appetite, establishing risk policies and monitoring the Group capital requirements.

Group Executive Committee

The Group Executive Committee ('GEC') is charged by the Group Board of Directors with overseeing the risk management programme, including Enterprise Risk Management. The GEC approves the use of the internal capital model to calculate the Group's economic and regulatory capital requirements and sets the strategic direction of the model so that it is aligned with the risk profile and risk culture of the Group.

Hub Chief Executive Officers

Responsibility for risk management is spread throughout the organisation. The chief executive officers of the Group's underwriting hubs are responsible for developing and executing a strategy and business plan in line with the Group's. They are also responsible for identifying and managing the risks to their hubs' objectives.

Group function heads

The heads of the Group's various functions are responsible for establishing Group-wide controls within their respective areas.

ERM Model Governance Committee

The committee meets regularly and is responsible for enhancing the GEC's risk-based strategic decision making by:

•        reviewing and monitoring key risk indicators against risk appetite;

•        overseeing governance of the internal risk and capital model;

•        considering short- and long-term capital requirements and assumptions for GEC consideration;

•        monitoring economic, regulatory and rating agency capital levels together with changes in capital positions against targets; and

•        monitoring the asset/liability positions and liquidity profile of the Group and its insurance carriers.

Emerging Risk Committee

The Emerging Risk Committee is responsible for considering the potential impact of future issues that might emerge from changes to the external environment. The committee meets regularly and reports to the ERM Model Governance Committee.

Group Chief Risk Officer

The Group Chief Risk Officer has broad responsibility for ensuring compliance with the Group's risk policy through the execution of the Enterprise Risk Management ('ERM') programme.

Enterprise Risk Management

The objective of Catlin's ERM programme, led by the Group Chief Risk Officer, is to enhance decision-making across the business through an understanding of risk and a consistent, embedded Group-wide Risk and Capital Management Framework. This is intended to deliver a range of benefits that include:

•        a solid understanding of all risks and controls through an effective risk assessment process and their relationship to capital requirements;

•        more informed strategic and operational decision-making for enhanced profits and improved efficiency of capital using sophisticated capital modelling techniques;

•        selection of the most appropriate strategy from the range of available business decisions with direct reference to the Group's risk appetite;

•        strong internal and external risk management communication;

•        a consistent risk management programme throughout the Group to support the reduction of uncertainty and meet Catlin's desired risk profile as the business continues to grow and evolve;

•        promoting a transparent risk culture of accountability; and

•        meeting existing and evolving regulatory risk and capital requirements.

The ERM team structure is made up of experienced risk professionals who assist the Group Chief Risk Officer by providing expert guidance to support the business management of risk and providing timely and accurate management information, including Group-wide Own Risk and Solvency Assessments ('ORSA') covering the overall risk profile and the key risks of the Group.

Standard & Poor's has assessed Catlin's Enterprise Risk Management programme as 'Very Strong'.

Key risks

Key risks are considered both within the control framework and within the assessment of capital requirements. Catlin conducts in-depth stochastic modelling across all risk categories. This modelling aids in the development of capital requirements for strategic and annual business planning. The analysis is also shared with regulators for the assessment of risk-based statutory capital requirements.

Catlin analyses its key risks into the following categories:

Insurance risk

•        Underwriting risk for new business in a given planning period;

•        Underwriting risk for business already written but not yet earned; and

•        Reserving risk.

Other risk categories

•        Financial markets risk;

•        Liquidity risk;

•        Currency risk;

•        Credit risk; and

•        Operational risk.

Insurance risk represents the majority of the Group's capital drivers.

Management of underwriting risk

Underwriting risk includes the risk of inappropriate underwriting, inadequate pricing and ineffective management of underwriting delegated to third parties. 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 Underwriting Control Framework is designed to enable underwriters to operate within their markets and classes of business with sufficient freedom to effectively conduct business with local brokers and clients. Catlin believes that its underwriting teams have a high level of technical expertise supported by strong underwriting disciplines, well-defined authority levels, transparency of underwriting considerations that are open to debate and challenge, and forums for active discussion of trends, issues and underwriting strategy, as well as individual risk decisions.

The GEC has delegated responsibility for leading and directing underwriting activities to the Group Chief Underwriting Officer supported by the Group Underwriting Board. The Group Chief Underwriting Officer is accountable to the GEC and the Group Board of Directors regarding global underwriting performance.

The Group Underwriting Board works with the Group Chief Underwriting Officer to improve results by stretching underwriting thinking, planning and implementation through problem-solving, mentoring and challenge.

Strategy for managing underwriting risk

Catlin seeks to underwrite a diverse portfolio to enhance the potential returns for the accepted risk, both to increase profits and minimise capital exposure.

Catlin controls downside risk to capital via an underwriting portfolio that is diversified by both class and geographic markets.

Correlated risks are monitored and managed to enhance profit potential. Strategies for individual classes or territories are developed considering the Group's balance sheet in order to take best advantage of profit opportunities.

The outwards reinsurance programme is structured to provide capacity for the gross underwriting strategies and to ensure efficient use of the Group's capital within the approved risk appetite. Catlin's underwriting portfolio includes a material segment that is exposed to loss from catastrophic events or other correlated exposures. The inherent risk of a large aggregation of such losses poses one of the most substantial risks to the Group. Exposure to catastrophes and other material correlated exposures is modelled and managed to ensure alignment with the Group's approved risk appetite. Catlin has put in place a robust control structure to monitor the aggregation of materially correlated exposure. This exposure is further protected by a risk transfer programme that responds to an array of possible catastrophic events.

On an annual basis, the underwriting hubs and the GEC develop an underwriting plan for the consideration of and approval by the Group Board of Directors and the boards of the Group's insurance carriers. The Group Underwriting Board and the GEC monitor and report on the performance against the plan and pricing adequacy by hub and by class of business.

The Group Claims Director directs claims operations across the Group. Claims pose the greatest threat to Catlin's relationship with its clients since the value of the coverage sold by the Group will ultimately be judged by the way in which claims are handled.

Catlin has implemented a claims process and philosophy designed to ensure claims are settled swiftly and fairly, best protecting the interests of all stakeholders. The Claims function has in place approved policies and procedures which 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.

Management of reserving risk

Reserves for unpaid losses represent the largest single component of the Group's liabilities. Loss reserve estimates are inherently uncertain. Actual losses that differ materially from the provisions can have a significant impact on future earnings and the Group's balance sheet.

Catlin has a large, experienced team of actuaries and other actuarial staff which acts independently of Underwriting and Claims at all times. Actuaries work closely with other functions within the business to provide analysis, challenge, monitoring and reporting to these functions to ensure detailed understanding of the Group's exposures and loss experience, although underwriting decisions remain the responsibility of the Underwriting function.

Analysis of the reserve requirements are initially developed by actuaries embedded within the underwriting hubs with close knowledge of local underwriting activities. Reserves are subsequently reviewed by the Group Actuarial team and the Group Reserving Committee. Reserves are then presented to the Group Audit Committee for recommendation to the Group Board. The Group Chief Actuary oversees Catlin's reserving processes and reports separately to the Group Audit Committee. In addition, the Group receives independent external analysis of its reserve requirements.

Management of financial markets risk

The objective of the investment function is to create economic value for the Group whilst managing GAAP earnings risk and maintaining appropriate liquidity to meet expenses and claims within a comprehensive internal risk limit framework to minimise the downside risk to capital. The majority of Catlin's investments are in a low-risk core portfolio of cash and high-quality fixed income investments that are aligned with the profile of the Group's liabilities. This is complemented by a tactical portfolio invested in other instruments to extract liquidity premium and to benefit from market opportunities as they may arise.

All Group and subsidiary investments are managed by the Group Chief Investment Officer, under the direction of the GEC and the Investment Committee of the Group Board of Directors. The Group Board of Directors, through the Investment Committee, reviews and approves on a regular basis the investment strategy proposed by the Group Chief Investment Officer along with the limits contained in the Market Risk Framework. Subsidiary boards review and approve the strategy and the Investment Management Framework as it applies to investment of each subsidiary's assets.

Regular modelling is performed to test the structure, performance and liquidity of the investment portfolio in scenarios that include extreme insurance events coupled with investment losses. The economic market risk within the investment portfolio is monitored against set limits measured against a Minimum Risk Benchmark based on the cash flow profile of the liabilities of the Group. Limits are also in place to monitor the Financial Markets Risk in the annual accounted earnings under US GAAP.

The Head of Financial Markets Risk, within the Enterprise Risk Management function, independently reports to the GEC and the Board's Investment Committee regarding the position of Group assets relative to the Minimum Risk Benchmark and also monitors the risk within a set of agreed limits. This includes a qualitative assessment of the investment strategy to address any emerging issues that may not be reflected in historical data. Assets by subsidiary entity are tested against a benchmark based on the legal entity liabilities with regular reporting to the subsidiary entity management.

The Group has in-house investment portfolio management capabilities. In-house portfolio management activities are fully embedded in the Financial Markets Risk Framework and risk control and oversight processes as necessary.

Before a decision is made to contract with an external 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. A new products approval process is followed for any new investment instrument.

The Group continuously monitors the performance of each portfolio and manager and performs on-site visits of all external fund managers on a regular basis. Each portfolio and manager is given written investment guidelines against which its activities are monitored. The guidelines are reviewed regularly to ensure their appropriateness, with revisions made as required.

The Group continually monitors and stress tests its cash and investments to ensure that the Group meets its risk appetite for liquidity requirements.

The Group Treasurer, together with local financial officers, is responsible for ensuring that sufficient liquid investments are available as required by the Group and its subsidiaries. The Group Treasurer is also responsible for ensuring that cash is not overly concentrated with any one institution and operates within agreed limits.

The Group conducts business in a number of different currencies, primarily US dollars, sterling and euros. Trading risk arises from potential currency mismatch between cash flows. There is also the risk of gains or losses arising from exposure in currencies other than the entity reporting currency and upon consolidation. The Group takes steps to manage, but not eliminate, those risks. To reduce foreign exchange risk, the Group Treasurer considers the Group's currency requirements and the risks arising from foreign exchange fluctuations.

Key financial markets risks to the Group relate to inappropriate strategy, misalignment with Group risk appetite and inability to achieve appropriate diversification. These risks might crystallise as financial loss or insufficient risk-adjusted returns. Through its investment strategy, the Group is exposed to interest rate risk, credit default risk, foreign exchange risk, equity risk, commodity risk, real estate risk, illiquidity risk and inflation risk. As part of the strategy, the Group may hedge its exposures with overlays and options to manage portfolio and macro risks.

Portfolio management

Catlin uses bespoke portfolio management tools to enhance understanding of the risk profile of its underwriting and investment portfolios.

Catlin has developed sophisticated models to construct portfolios of insurance and reinsurance business that explore the relationship between risk and return. Extensive alternative scenarios are considered, each with a different potential mix of business classes. This modelling enables the consideration of mixes of business that might produce higher levels of expected profitability with less volatility of return. This output is then analysed in the light of practical market and resource constraints to develop tactical shifts in the Group's mix of business to utilise capital more efficiently.

Portfolio management is designed to help move Catlin closer to an efficient frontier where expected return is maximised for a given level of volatility of return. The analysis considers a range of risk metrics over different return periods to ensure that the effects of individual strategies are taken into account to support tactical business planning decisions. This modelling considers dynamic near-term market conditions while maintaining awareness of longer-term strategic aims.

Catlin's portfolio management builds on the existing framework of:

•        underwriting and investment skill and judgment;

•        other underwriting and investment tools and management;

•        granular level portfolio management; and

•        insight into how markets might evolve.

Management of credit risk

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

The risk of recovering reinsurance is managed by the Group Chief Operating Officer, who along with the Chief Financial Officer is a member of the Group's 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 the security of all non-traditional risk transfers.

Credit risk arising from fixed income instruments is managed by the Group Chief Investment Officer. Credit risk arising from banking counterparties is managed by the Group Treasurer. The professional fund managers are given guidelines regarding the minimum quality of investment instruments to be purchased.

Credit risk arising from underwriting risk is managed through the Underwriting Control Framework. There is a high level of communication between the underwriting and investment management staffs to ensure awareness and management of any overlapping credit exposure.

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.

A comprehensive set of concentration limits designed to reduce the Group's exposure to individual investment and banking counterparties is monitored by the Head of Financial Markets Risk within the ERM function independently of the operating functions. Areas where significant concentration of risk may exist within inwards underwriting and outwards reinsurance follow a similar set of principles. The Group believes that there are no significant concentrations of credit risk between its investments or its reinsurers.

Management of operational risk

Catlin's commitment to the management of operational risk requires that a robust risk identification and assessment programme operates consistently throughout the Group and that management is required to ensure that a risk and control framework is in place to protect against potential operational failures.

The Chief Executive Officer of each hub and Group heads of functions, in conjunction with the GEC, are responsible for ensuring the identification and appropriate management of operational risk. Each hub Chief Executive Officer is required to establish and adhere to appropriate operational policies and procedures.

The Operational Risk and Control Framework comprises a number of components that allow the Group to manage and monitor its operational risk profile. The minimum standards for each of the components are set out in the Group Operational Risk Policy and implemented across the Group, with every member of staff accountable for actively managing operational risk.

Risk assessment is core to the framework and used to identify and assess the key operational risks intrinsic to Catlin processes, products, systems and material change activities. For all key operational risks, a specific control framework is in place that includes processes by which business areas actively manage the risks.

The formal Operational Risk Assessment Programme is directed by the Group Head of Operational Risk, who together with the Group and local risk teams support business areas and hubs by provision of expert guidance to deliver a robust risk identification and control assessment and to assist with oversight of compliance with risk policies and control frameworks.

Assurance

The GEC and the Group Board of Directors actively seek assurance over the effectiveness of the Risk and Control Framework. The Group Head of Internal Audit directs a risk-based internal audit programme across all Group operations and subsidiaries. The programme is designed to assist the Group Board and the GEC to protect the assets, reputation and sustainability of the organisation. It does this by assessing whether all significant risks are identified and appropriately reported by management and the risk function to the Group Board and the GEC; assessing whether these risks are adequately controlled; and by challenging the GEC to improve the effectiveness of governance, risk management and internal controls.

From time to time, the Group obtains assurance from independent third-party specialists on selected key operations. For example, actuarial reserving is reviewed by an independent actuarial firm. In compliance with standards set by the Chartered Institute of Internal Auditors, the effectiveness of the internal audit function is periodically assessed by an independent reviewer.

Enterprise Risk Management also provides a Model Validation Framework based upon the same three lines of defence within the rest of the business. The high level of use and application of the internal capital model within the business provides a natural element of validation between the capital modelling and senior management and other stakeholders. The structure of the Enterprise Risk Management function enables subject matter experts to peer review the theory, expert judgment and assumptions used in the model.

Directors of the Company

Name	Function
John Barton	Chairman
Stephen Catlin	Chief Executive and Deputy Chairman
Benjamin Meuli	Chief Financial Officer
Claus-Michael Dill	Non-Executive Director
Beatrice Hollond	Non-Executive Director
Robert Gowdy	Non-Executive Director
Fiona Luck	Non-Executive Director
Nicholas Lyons	Senior Independent Non-Executive Director

 

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