Final Results

RNS Number : 0863X

Catlin Group Limited

09 February 2012

 



CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS
FOR YEAR ENDED 31 DECEMBER 2011

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 2011.

Highlights

·   US$71 million in profit before tax (31 December 2010: US$406 million)

·   50 per cent attritional loss ratio (31 December 2010: 52 per cent)

·   US$961 million in gross losses from natural catastrophes; US$678 million in net losses from natural catastrophes

§ Catastrophe aggregate protection responded as anticipated to catastrophe losses during second half of 2011

·   11 per cent increase in gross premiums written (31 December 2010: 10 per cent)

§ 24 per cent increase in gross premiums written by non-London/UK hubs

·   3.1 per cent total investment return (31 December 2010: 2.7 per cent)

·   US$103 million release from prior year reserves, equal to 2 per cent of opening reserves
(31 December 2010: US$144 million, equal to 3 per cent of opening reserves)

·   5 per cent increase in average weighted premium rates for 1 January 2012 renewals (9 per cent increase for catastrophe-exposed classes; 1 per cent increase for non-catastrophe classes)

§ 17 per cent increase in US Property Treaty Reinsurance rates; 12 per cent increase in International Property Treaty rates

·   6 per cent increase in annual dividend to 28.0 UK pence per share (44.9 US cents) (31 December 2010: 26.5 UK pence; 42.5 US cents)

US$m		2011	2010
Gross premiums written		$4,513	$4,069
Net premiums written		$3,835	$3,318
Net premiums earned		$3,612	$3,219
Net underwriting contribution1		$324	$683
Total investment return		$256	$212
Net income before income taxes		$71	$406
Net income to common stockholders		$38	$337
Earnings per share (US dollars)		$0.11	$0.98
Total dividend per share (pence)		28.0p	26.5p
Total dividend per share (US cents)		44.9¢	42.5¢
Loss ratio2		70.0%	57.5%
Expense ratio2		32.6%	32.3%
Combined ratio2		102.6%	89.8%
Total investment return		3.1%	2.7%
Return on net tangible assets3		1.7%	16.3%
Return on equity3		1.3%	12.5%
		31 Dec 2011	31 Dec 2010
Total assets		$12,959	$12,082
Investments and cash		$8,388	$8,021
Stockholders' equity		$3,298	$3,448
Unearned premiums		$2,119	$1,886
Net tangible assets per share (sterling)4		£3.93	£4.24
Net tangible assets per share (US dollars)4		$6.08	$6.53
Book value per share (sterling)4		£5.06	£5.41
Book value per share (US dollars)4		$7.85	$8.34

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

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

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

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

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

"2011 was a tough year for the insurance industry and for Catlin due to the extraordinary series of natural catastrophes.  However, Catlin performed well. Whilst the Group sustained nearly US$1 billion in gross losses from natural catastrophe claims, Catlin's profit before tax amounted to US$71 million.

"Catlin has not only grown in size, but it has significantly increased value for its shareholders since its initial public offering, despite the tough economic conditions during much of that period.  Since 31 March 2004, Catlin has produced total shareholder return amounting to 93 per cent, compared with average total shareholder return of 71 per cent for FTSE 350 companies during that same period."

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

"Notwithstanding the exceptional series of natural catastrophes in 2011, Catlin continued to build its global business. Gross premiums written increased by 11 per cent, and premium volume written by our non-London/UK underwriting hubs rose by 24 per cent. Our Group-wide attritional loss ratio was 50 per cent, the lowest in five years.

"Our structure is designed to perform in all phases of the market cycle. Market conditions are improving, especially for catastrophe-exposed business classes for which rates increased by 9 per cent at 1 January 2012 renewals. Whilst it may be too early to declare that the market has turned, nearly all signals are encouraging.

"I believe that Catlin today is in a strong position. We have a structure that is capable of substantial, profitable growth at a time when excellent opportunities are arising."

- ends -

For more information contact:

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

Notes to editors:

1.       Catlin Group Limited, headquartered in Bermuda, is an international specialist property/
casualty insurer and reinsurer that underwrites 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 2011 - balance sheet:  £1= US$1.55 (2010: £1 = US$1.54); income statement (average rate): £1 = US$1.60 (2010: £1 = US$1.55).

5.       Earnings per share are based on weighted average shares in issue of 344 millionduring 2011. Book value per share is based on 345 million shares in issue at 31 December 2011.  Both calculations exclude Treasury Shares held in trust.

6.       Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2011 is attached, including statements from the Chairman and Chief Executive along with underwriting, financial and investment performance commentary.

Chairman's Statement

2011 was a tough year for the insurance industry and for Catlin.  A record series of natural catastrophes produced insured losses of more than US$100 billion for the industry. Rate competition adversely affected many classes of insurance and reinsurance. The ongoing economic uncertainty kept interest rates low, reducing many insurers' investment returns.

Despite these pressures, Catlin performed well. Whilst the Group sustained nearly US$1 billion in gross losses from the natural catastrophes and operated in a challenging investment environment, profit before tax amounted to US$71 million, with a return on net tangible assets of 1.7 per cent. I am pleased with the Group's performance in what was an extraordinarily difficult year.

Catlin's underlying performance was strong. The attritional loss ratio - which excludes the impact of catastrophe losses, large single-risk losses and reserve releases - was the lowest in five years.  Our 3.1 per cent total investment return was significantly greater than we expected at the start of 2011. 

Most importantly, the Group ended the year with a solid capital base. We have also begun to supplement that capital with innovative third-party capital arrangements. This will allow the Group to take advantage of the promising underwriting opportunities that are currently arising in many business classes and to increase premium volume without seeking additional capital from our shareholders. At the same time, we will earn commissions and fees on the business that is underwritten on behalf of the third parties.

Dividend

Catlin has increased the dividend it pays to shareholders each year since its initial public offering in 2004.  We believe this policy has served shareholders well, although it must be tempered by the incidence and scale of catastrophe losses and the need to preserve capital to take advantage of market opportunities.

The Board of Directors has declared a final dividend of 19.0 UK pence (30.2 US cents) per share, payable on 16 March 2012 to shareholders of record on 17 February 2012. Including the interim dividend of 9.0 UK pence (14.7 US cents) per share, the total 2011 dividend of 28.0 UK pence (44.9 US cents) per share represents a 6 per cent increase when compared with the 2010 dividend.

Including the 2011 dividend, the annual dividend payable by Catlin to its shareholders in sterling has increased by 159 per cent since 2004.

Dividends paid since initial public offering (UK pence)

		Interim dividend	Final dividend	Total dividend
2004		3.8	7.0	10.8
2005		4.7	8.8	13.5
2006		5.2	14.9	20.1
2007		7.1	14.8	21.9
2008		7.5	15.7	23.2
2009		8.2	16.8	25.0
2010		8.6	17.9	26.5
2011		9.0	19.0	28.0

Board of Directors

Jean Claude Damerval and Guy Beringer - who have served on the Catlin Board of Directors since 2005 and 2009, respectively - have chosen to retire as Non-Executive Directors following the 2012 Annual Meeting in May.  I would like to express my thanks to Jean Claude and Guy for their service to the Catlin Board and its committees and for their contributions to the Group over the years.

John Barton joined the Board of Directors as a Non-Executive Director in December. John served as Chief Executive of Jardine Insurance Brokers Group for 13 years and later served as Chairman of Jardine Lloyd Thomson Group, the successor company to JIB. He has also served as Chairman of Wellington Underwriting plc and Brit Holdings plc, and is currently Chairman of Next plc. 

Conclusion and outlook

As announced at mid-year, I will also step down from the Board following the AGM and, subject to shareholder approval, John Barton will succeed me as Chairman of Catlin. John's wide experience in both the insurance industry and in other business sectors, especially in the Asia-Pacific region, makes him well-qualified to serve as Catlin's Chairman.  I wish John all the best in his new role.

It has been my privilege to serve as Chairman of the Catlin Group for the past nine years. The Group has changed dramatically during this time, growing from a company with fewer than 200 employees that primarily did business from London to a truly international organisation with nearly 2,000 employees working from 55 offices on five continents.

During my tenure, the Group successfully completed its initial public offering in 2004. Two years later, Catlin acquired Wellington Underwriting plc, which not only nearly doubled the size of the Group but transformed Catlin into one of the world's leading specialty insurers and reinsurers. Using the acquisition as a springboard, we expanded our operations throughout Europe, the United States, Canada and the Asia-Pacific region. That investment is now paying off.

Whilst Catlin is a very different company today than it was when I became Chairman in 2003, the culture and ethos of the Group has not changed significantly. That's truly remarkable, and I attribute that to the leadership of Stephen Catlin.  It has been a great pleasure to work with Stephen and his talented team, and I wish to thank them for all their support and hard work over the years.

Catlin has not only grown in size, but it has significantly increased value for its shareholders since the IPO, despite the tough economic conditions during much of that period.  Since 31 March 2004, Catlin has produced total shareholder return amounting to 93 per cent, compared with average total shareholder return of 71 per cent for FTSE 350 companies over that same period.

What pleases me the most is that I hand over to my successor a business which is well-placed to take advantage of improving market conditions, to continue to grow profitably and to increase shareholder value in the future.

Sir Graham Hearne

Chairman

Chief Executive's Review

In commenting on Catlin's half-year results, I said that I was confident that the unprecedented series of major natural catastrophes during 2011 would be an 'earnings event' for Catlin rather than a 'capital event'.

This has been borne out by events; the Group produced profits before tax in 2011 amounting to US$71 million. This is a good result, considering that Catlin sustained US$961 million of gross catastrophe losses during 2011, 40 per cent of which were incurred during the second half of the year.

Catastrophe losses such as those during 2011 are unusual but not unexpected. In anticipation of such years, we have structured our risk transfer programme, including our Catastrophe Aggregate protection, not to protect our earnings stream, but to ensure that our capital base is not eroded. That was the case during 2011, and producing a profit after sustaining nearly US$1 billion in gross catastrophe losses is a good result.

Notwithstanding the catastrophe losses and their impact on our financial results, the Group's underlying performance during 2011 was strong:

·      Market conditions are improving.  Rates for Property Treaty Reinsurance and other catastrophe-exposed classes increased during 2011 following the series of catastrophe events. At 1 January 2012 renewals, rates for non-correlated business classes began showing signs of improvement. Whilst it may be too early to declare that the market has turned, nearly all signals are encouraging.

·      Our international platform for growth is in place.  Gross premiums written increased by 11 per cent in 2011, with nearly all of that increase produced by our non-London/UK underwriting hubs. Our investment in these hubs over the past decade continues to bear fruit, allowing us to expand our distribution outside of the London wholesale market. We believe there is significant potential for further growth, no matter what the market conditions.

·      This growth has been profitable. The Group's attritional loss ratio was the lowest in five years, an excellent achievement considering the competitive conditions for most non-catastrophe classes of business during 2011. The non-London/UK underwriting hubs generated 48 per cent of gross premium volume and produced 45 per cent of underwriting contribution if catastrophe losses are not taken into account. However, we are not sacrificing loss ratio for top-line growth.

I believe that Catlin today is in a strong position: we have a structure that is capable of substantial, profitable growth at a time when excellent opportunities are arising.

2011 performance

Net income to common shareholders amounted to US$38 million (2010: US$337 million).  The return on net tangible assets amounted to 1.7 per cent (2010: 16.3 per cent), whilst return on equity was 1.3 per cent (2010: 12.5 per cent).

The catastrophe losses significantly reduced the Group's profits in 2011, but Catlin has met its target to provide returns that exceed the risk-free rate by 10 percentage points over the course of an underwriting cycle.  Since the Group's initial public offering in 2004, Catlin's average return on net tangible assets has amounted to 17.1 per cent, and average return on equity was 13.4 per cent. By comparison, the average risk-free rate (as measured by 12-month US dollar Libor) was 2.9 per cent. During this period, the insurance industry has suffered three of the worst catastrophe years on record.

Compounded return on net tangible assets 2004-2011

	Return on net tangible assets	Cumulative return on net tangible assets	6-month US dollar Libor	Cumulative 6-month US dollar Libor plus 10 percentage  points
2004	21.8%	21.8%	2.1%	12.1%
2005	2.2%	24.5%	4.3%	28.2%
2006	28.2%	56.7%	5.3%	47.8%
2007	36.1%	117.4%	5.1%	70.2%
2008	(2.8%)	111.3%	3.1%	92.5%
2009	33.2%	181.5%	1.6%	114.7%
2010	16.3%	227.4%	0.9%	138.2%
2011	1.7%	233.0%	0.8%	163.3%

Strategy

The Group has a simple strategy based upon:

·      underwriting discipline;

·      diversification, by both geography and business class;

·      an emphasis on capital preservation and flexibility; and

·      a corporate culture based on five core values: transparency, accountability, teamwork, integrity and dignity.

Underwriting discipline

Catlin's underlying underwriting performance during 2011 was strong. The attritional loss ratio - a benchmark that excludes the impact of catastrophe losses, large single-risk losses and reserve releases - was 50.0 per cent, a reduction from 51.6 per cent in 2010 and the lowest in five years.

Attritional loss ratio 2007-2011 (%)

	Attritional loss ratio
2007	51.0%
2008	54.0%
2009	53.7%
2010	51.6%
2011	50.0%

This performance was achieved during a year when the Group increased premium volume in a difficult pricing environment for many classes of business.  Over the years, we have assembled an excellent team of underwriters and provided them with sophisticated pricing and portfolio management tools. 

Overall, the Group's underwriting contribution amounted to US$324 million (2010: US$683 million), a favourable result considering the level of catastrophe losses in 2011.

The Group released US$103 million from prior year loss reserves during 2011 (2010: US$144 million), an amount equal to 2 per cent of opening reserves (2010: 3 per cent).  The 2011 reserve release continues Catlin's track record of consistent reserve releases.

Prior year reserve releases 2007-2011(US$m)

	Prior year reserve release	Percentage of opening reserves
2007	$139	4%
2008	118	3%
2009	94	2%
2010	144	3%
2011	103	2%

Diversification

In parallel with our commitment to disciplined underwriting, the Group focuses on the diversification of our risk portfolio.

Catlin has invested over the past decade in our operations outside the United Kingdom. Our investment is producing profitable growth that the Group would be unable to achieve if it had not diversified beyond the London wholesale market.  Our infrastructure is scalable to take advantage of opportunities as they arise.

Gross premiums written by the Group's underwriting hubs in Bermuda, the United States, the Asia-Pacific region, Europe and Canada increased by 24 per cent in 2011, compared with the 1 per cent increase in the London/UK hub's volume. The non-London/UK hubs now account for 48 per cent of the Group's gross premiums written. 

The catastrophe losses had an adverse impact on the underwriting contribution produced by the non-London/UK hubs in 2011, especially the Bermuda and Asia-Pacific hubs. However, if the impact of the catastrophe losses is excluded, the non-London/UK hubs produced a significant proportion - 45 per cent - of the Group's total underwriting contribution.

Gross premiums written by the Europe hub increased by 55 per cent to US$354 million (2010: US$229 million), which reflects Catlin Re Switzerland's successful first year of operations. Not only did our new European-based reinsurance operation underwrite more than US$140 million in new business and achieve profitability targets in 2011, it added significantly to the diversification of the Group's underwriting portfolio. Catlin Re Switzerland underwrites property/casualty classes of reinsurance for European clients, a sector in which Catlin previously had a small market share. In addition, it writes a book of Credit and Political Risk reinsurance for a global client base, business which is largely uncorrelated with catastrophe coverages.

Capital preservation and flexibility

Catlin's emphasis on capital preservation - including the Group's Catastrophe Aggregate programme - was demonstrated during 2011.  Not only did the Group report a profit during a year of extraordinary catastrophe activity, we have maintained a solid capital base that will allow Catlin to take advantage of emerging underwriting opportunities.

The Catastrophe Aggregate programme protects the Group against the frequency and severity of catastrophe events in major catastrophe zones.  The programme is structured to reduce capital volatility caused by catastrophe losses over the course of a calendar year.  The programme contains aggregate deductibles that are eroded by catastrophe activity, and recovery is much more likely in the second half of any year.

The 2011 Catastrophe Aggregate programme responded to the catastrophe losses as we had expected. Whilst 60 per cent of gross catastrophe losses were sustained by the Group in the first half of 2011, meaningful recoveries did not begin until the second half.

Gross and net catastrophe losses 2011 (US$m)

		Gross catastrophe losses	Net catastrophe losses (after reinsurance recoveries and reinstatement premiums
Six-month period ended 30 June		574	534
12-month period ended 31 December		961	678

Profitability built steadily during 2011 and the recoveries from the Catastrophe Aggregate programme had a significant impact on the Group's profit before tax when measured on a quarterly basis.

Profit before tax by quarter 2011 (US$m)

		Profit before tax	Cumulative profit before tax
Period ended 31 March		(273)	(273)
Period ended 30 June		72	(201)
Period ended 30 September		120	(81)
Period ended 31 December		152	71

The 2012 Catastrophe Aggregate protection is substantially similar to the 2011 programme, although there have been some changes dictated by market conditions.  Limits remain from the 2011 protection to mitigate adverse development of losses arising from the 2011 catastrophes.

One of Catlin's competitive advantages is the flexibility of our capital structure, which allows the Group to allocate capital to those regions and classes of business that offer the best profit potential.

We have increased our capital flexibility for 2012 and beyond by forming strategic partnerships with third-party capital providers. These arrangements provide a modest capital benefit for 2012, allowing Catlin to increase its premium volume and providing a foundation to expand third-party capital in future years should new, profitable growth opportunities warrant.

Three Special Purpose Syndicates at Lloyd's have been established by third-party capital providers to underwrite whole-account quota share reinsurance of the Catlin Syndicate.  Catlin will manage the syndicates on behalf of the capital providers. In addition, the Group has purchased an Adverse Development Cover that, subject to limits, provides protection against the deterioration of loss reserves relating to the Group's 2009 and prior underwriting years. 

We believe that these arrangements offer real benefits to Catlin and its shareholders by allowing the Group to take advantage of new opportunities, thereby improving the quality of earnings for existing shareholders. The Special Purpose Syndicates will produce fees and commissions payable to the Group, whilst the Adverse Development Cover is a prudent way to reduce the risk of prior-year reserve deterioration.

We are especially pleased with our partnership with China Reinsurance (Group) Corporation, which is sponsoring one of the Special Purpose Syndicates. The syndicate represents the first direct investment by a Chinese entity in the Lloyd's market.  This partnership with China Re will allow Catlin to expand its knowledge of insurance and reinsurance practices in China, allowing us to increase our presence in a rapidly growing marketplace.  In return, the alliance will help China Re gain a better knowledge of Lloyd's and will increase China Re's presence in the international reinsurance market.  As part of the relationship, China Re employees will work from Catlin's London offices as secondees.

Catlin's investment strategy aims to maximise economic value whilst minimising downside risk to capital and controlling earnings volatility. Investment performance was good during 2011, producing a total investment return of 3.1 per cent (2010: 2.7 per cent). Total investment income increased 21 per cent to US$256 million, (2010: US$212 million).

Investment return primarily benefitted from the appreciation of the fixed income portfolio as interest rates declined, as well as the active management of credit and sovereign risk within the fixed income portfolio.

The Catlin Culture

I believe that a major reason for Catlin's success is our corporate culture.  This culture empowers Catlin employees to act to the best of their abilities and reinforces the partnerships that must exist between our employees and clients, brokers and shareholders.

Catlin has been recognised for high standards of service to brokers and clients, which I believe is a direct product of our culture. Our London underwriting and claims teams have both received top rankings in independent surveys of brokers. We aim to apply those standards to our operations worldwide.

Just as we have a responsibility to our clients and our shareholders, Catlin takes seriously its responsibility to the communities in which we operate.  These efforts range from our global projects such as the Catlin Arctic Survey, which helps scientists gather facts to better understand how our environment is changing, to initiatives sponsored by local offices to provide better opportunities to children and young people.  Our community responsibility efforts in London were recognised last year when Catlin received a prestigious Dragon Award from the Lord Mayor of London for our efforts to help improve a local secondary school.

I am proud of our employees, whose hard work in a difficult year has again resulted in a positive performance by the Group.  I sincerely thank them for their efforts, and look forward to working with them to take advantage of the excellent opportunities that exist for Catlin.

I would also like to take this opportunity to thank Sir Graham Hearne, who will step down in May as the Group's Chairman following the Annual General Meeting. The contributions that Sir Graham has made to Catlin during the past nine years are far too many to count or describe in detail. It has been my great privilege and a source of significant enrichment to serve under him during this period of rapid growth and evolution. I wish Sir Graham well in his future endeavours.

We at Catlin have been building a business for the future ever since the Group was established in 1984.  Despite a tough year in 2011, our future has never been brighter. 

Stephen Catlin

Chief Executive

Key Performance Indicators

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

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

Book value per share plus dividends (US$)*

	Book value per share	Dividends per share paid during year	Book value per share plus dividends
2007	8.38	0.43	8.81
2008	6.61	0.44	7.05
2009	7.68	0.37	8.05
2010	8.34	0.40	8.74
2011	7.85	0.44	8.29

The Group believes that the change in book value per share, plus the common share dividend paid during a calendar year, is an appropriate measure of shareholder value creation.  Shareholder value using this metric marginally decreased during 2011. The vesting conditions of Catlin's Employee Performance Share Plan are based on growth in book value per share plus dividends paid during rolling three- and four-year periods.

Net tangible assets per share plus dividends (US$)*

	Net tangible assets per share	Dividends per share paid during year	Net tangible assets per share plus dividends
2007	5.73	0.43	6.16
2008	4.63	0.44	5.07
2009	5.90	0.37	6.27
2010	6.53	0.40	6.93
2011	6.08	0.44	6.52

Shareholder value can also be measured on a similar basis by combining the annual increase in net tangible value per share with the dividends paid to shareholders during a calendar year. Growth in net tangible assets per share more accurately assesses the Group's performance against its underwriting capital, which excludes goodwill and other intangibles. Measured on this basis, shareholder value was broadly maintained during 2011.

*  Pre-2009 book value and net tangible assets per share and dividend amounts have been adjusted for the effect of the 2009 Rights Issue.

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

		Return on equity	Return on net tangible assets
2007		22.9%	36.1%
2008		(1.9%)	(2.8%)
2009		24.3%	33.2%
2010		12.5%	16.3%
2011		1.3%	1.7%

Catlin aims to produce a return on equity that is 10 percentage points above the risk-free rate over an underwriting cycle. Catlin has exceeded this target on a cumulative basis since its IPO in 2004.  In 2011 return on equity and return on net tangible assets fell short of this target due to nearly US$700 million in natural catastrophe losses (net of reinsurance and reinstatement premiums).

Income before tax (US$)

	Income before tax
2007	543
2008	(13)
2009	603
2010	406
2011	71

Pre-tax profitability is an effective measure of the combination of underwriting performance, expense control and investment return.  The reduction in profits before tax during 2011 was primarily the result of the impact of the extraordinary series of natural catastrophe losses during the year. 

Net premiums earned (US$m)

	Net premiums earned
2007	2,490
2008	2,596
2009	2,918
2010	3,219
2011	3,612

The Group regards net premiums earned as a relevant indicator of underwriting volume during a calendar year. Net premiums earned increased by 12 per cent in 2011, reflecting the growth of the Group's underwriting portfolio outside of the London/UK underwriting hub.  At 31 December 2011, the Group had US$2.1 billion of unearned premiums on its balance sheet, a 12 per cent increase from the previous year.

Total investment return (%)

	Total investment return
2007	4.6%
2008	(1.4%)
2009	5.9%
2010	2.7%
2011	3.1%

Total investment return measures investment income plus realised and unrealised gains and losses produced by the Group's asset portfolio.  The total investment return of 3.1 per cent during 2011 is regarded as a good performance and exceeded the Group's expectations. The performance resulted from the appreciation of the fixed income portfolio as interest rates declined, the Group's active management of credit and sovereign risk, and the increased duration of the portfolio.

Loss ratio (%)

	Attritional loss ratio	Loss ratio
2007	51.0%	46.4%
2008	54.0%	62.9%
2009	53.7%	57.6%
2010	51.6%	57.5%
2011	50.0%	70.0%

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is a measure of underwriting performance.  The attritional loss ratio - which excludes catastrophe and large single-risk losses and reserve movements - is a measure of underlying, longer-term underwriting profitability.  The loss ratio was inflated in 2011 by the catastrophe losses, whilst the attritional loss ratio, the lowest in five years, reflects Catlin's disciplined underwriting.

Expense ratio (%)

	Total investment return
2007	34.1%
2008	32.0%
2009	31.5%
2010	32.3%
2011	32.6%

The expense ratio measures the Group's policy acquisition costs and operating expenses as a percentage of net premiums earned.  The increase in the expense ratio in 2011 is primarily the result of foreign exchange movements when translating sterling-based expenses into US dollars. The expense ratio excludes profit-related bonuses, employee share schemes, certain Group corporate costs, investment expenses and financing costs.

Employee turnover (%)

	Total investment return
2007	19.7%
2008	14.0%
2009	10.4%
2010	9.8%
2011	12.7%

Catlin seeks to attract and retain high-calibre employees; the employee turnover rate measures the Group's success in retaining staff members.  The employee turnover rate of 12.7 per cent during 2011 is within the Group's expectations. 

Claims performance (%)

	Highly recommended
2007	25.0%
2008	Survey not conducted
2009	31.0%
2010	30.0%
2011	33.0%

Catlin believes that an insurer demonstrates its true worth to a client following a claim.  The Group in part measures its claims handling performance through a survey by Gracechurch Consulting, which asks London market brokers which insurer they would highly recommend on the basis of the quality of claims service.  In 2011, 33 per cent of brokers highly recommended Catlin, which was three percentage points higher than in 2010. Catlin remains the most highly recommended insurer by surveyed brokers.

Underwriting Review

The combination of a strong underlying underwriting performance and the response of the Group's outwards reinsurance programme to the unprecedented series of catastrophe losses during 2011 enabled Catlin to produce US$324 million of underwriting contribution, a good result considering the market environment.

The attritional loss ratio of 50.0 per cent (2010: 51.6 per cent), which excludes the impact of catastrophe and large single-risk losses and reserve releases, was the lowest in five years. This result further highlights the benefits of Catlin's ongoing strategy of disciplined underwriting, international geographical distribution and a commitment to technical excellence.

The Group's own catastrophe loss experience during 2011 was in line with its catastrophe threat scenarios. The impact on the Group's profits from the catastrophe losses has been diluted due to Catlin's diversified underwriting portfolio and its prudent approach to the use of reinsurance.

The Group believes that its ongoing strategy leaves it well-positioned for 2012 and beyond, irrespective of market conditions.

Market Review

Loss Experience

2011 was an historic year for natural catastrophe losses. Aon Benfield reports that 253 'significant events' caused US$435 billion of economic losses, making it the costliest year ever on this basis. In context, Munich Re believes that economic losses from natural catastrophes are 46 per cent greater than during 2005, the previous record year.

In terms of insured losses, Aon Benfield reports that 2011 produced natural catastrophe losses of US$107 billion, making it the second costliest year on record after 2005, a year in which the US$113 billion in insured losses included those from Hurricane Katrina and several other Atlantic hurricanes. If losses from the 2011 catastrophes - in particular those from the Thai floods - deteriorate further, 2011 could become the costliest year ever for insured losses.

Fatalities arising from 2011 catastrophe events totalled more than 27,000, with almost 16,000 deaths alone arising from March's Tohoku earthquake and subsequent tsunami in Japan. Despite the tragic loss of life, Munich Re reports that the number of catastrophe-related fatalities during 2011 was less than in previous years.  An average of 106,000 people died annually as a result of natural catastrophes between 2001 and 2010, and 296,000 people died as a result of catastrophes during 2010, mostly due to the Haitian earthquake. Fatalities and insured damage arising from natural catastrophes are not necessarily linked.  The 26 December 2004 Indian Ocean tsunami claimed more than 200,000 lives, but caused relatively modest insured damage.

Approximately 55 per cent of the insured losses came from three events: the Japanese earthquake/tsunami; earthquakes in Christchurch, New Zealand; and the severe flooding in Thailand during the second half of the year.

Ten largest insured natural hazard events in 2011

Date	Event	Location	Estimated fatalities	Estimated structure claims	Estimated economic loss  (US$bn)	Estimated insured loss (US$bn)
11 March	Earthquake	Japan	15,844	1,100,000	210	35
22 February	Earthquake	New Zealand	182	156,313	30	14
25 July-30 November	Flooding	Thailand	790	4,000,000	45	11
22-28 April	Severe weather, tornadoes	US (Southeast, Great Plains, Midwest)	344	700,000	10	7
21-27 May	Severe weather, tornadoes	US (Great Plains, Midwest, Southeast)	181	750,000	9	7
22-30 August	Hurricane Irene	US, Canada, Bahamas, Caribbean Islands	46	835,000	9	5
21 December 2010-14 January 2011	Flooding	Australia (Queensland)	36	58,463	30	2
3-5 April	Severe weather	US (Midwest, Southeast, Great Plains)	9	225,000	3	2
13 June	Earthquake	New Zealand	1	53,963	30	2
14-16 April	Severe Weather	US (Great Plains, Southwest, Midwest)	48	150,000	3	2
All other events					87	21
Total					435	107

Source: Aon Benfield

The most significant event of 2011 - both in terms of fatalities and insured losses - was the Tohoku earthquake. The 9.0 Mw magnitude earthquake struck on 11 March with an epicentre some 40 miles east of Tohoku.  The subsequent tsunami first made landfall at Miyako less than an hour later. Although this was the strongest Japanese quake ever recorded, it was the subsequent tsunami that caused the greatest damage to Japan's eastern seaboard, with surge waters reaching as far as 6 miles inland.

Whilst economic losses have been estimated in the region ofUS$210 billion, insured losses are currently estimated at approximately US$35 billion.

The second largest insured loss was the 'New Zealand II' earthquake which struck Christchurch in February. It was the second in a series of significant earthquakes in the same region within nine months. The 6.3Mw earthquake caused 182 fatalities and US$30 billion of insured losses.

The most catastrophic weather-related event during 2011 was the extensive flooding in Thailand in the second half of the year, most significantly in the Chao Phraya and Mekong River basins.  Persistent monsoon rains and an active cyclone season resulted in the worst flooding in Thailand for 50 years. Houses, farmland and industrial estates were damaged, costing an estimated US$45 billion in economic losses. It is estimated that at least US$11 billion of these losses were insured, but some observers believe the final cost of the Thai floods could easily exceed US$15 billion.

The remainder of insured catastrophe losses arose primarily from severe weather events.  Despite just one US hurricane landfall (Hurricane Irene), significant losses were incurred in the United States, driven largely by the deadliest and most costly tornado season ever. Total insured losses arising from US thunderstorms and tornadoes in 2011 amounted to approximately US$26 billion, with the loss of more than 550 lives.

The single deadliest tornado occurred during May in Joplin, Missouri, where a single storm claimed more than 150 lives and caused more than US$2 billion of insured damage.  This was both the deadliest and costliest tornado to touch down in the United States for more than 50 years.

Despite seeing a slightly above average number of named storms during 2011, the US Windstorm season only generated three major Atlantic hurricanes, of which only one made US landfall. During August Hurricane Irene travelled across the Caribbean before reaching the coast of North Carolina and then moving northwards to New York, New England and Canada. Despite reaching the New York area as only a Category 1 storm, Irene caused US$9 billion of economic losses, with wind and flood damage causing insured losses of around US$5 billion.

Other losses to note during 2011 were:

Ÿ	flooding in and near Brisbane, Australia, during January;
Ÿ	the landfall of Cyclone Yasi in Queensland, Australia, also during January; and
Ÿ	significant flooding in Copenhagen in July following a violent cloudburst which saw the equivalent of 2 months of rain fall during a two-hour period.

Pricing

Average weighted premium rates across the Group's underwriting portfolio increased by 2 per cent during 2011 (2010: 1 per cent decrease). Average weighted premium rates increased by 4 per cent for catastrophe-exposed classes but were flat for non-catastrophe classes.

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

Rating indexes for catastrophe and non-catastrophe business classes 1999-2011

	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Catastrophe classes	261%	250%	253%	230%	251%	256%	205%	207%	213%	193%	135%	107%	100%
Non-catastrophe classes	189%	189%	193%	187%	190%	200%	205%	208%	200%	175%	135%	103%	100%
All classes	211%	208%	211%	200%	209%	217%	204%	206%	204%	181%	135%	105%	100%

Rating index base: 100 per cent in 1999

Following the catastrophe events in January through May, pricing for catastrophe-impacted lines increased at the key 1 June and 1 July renewal dates. The Property Treaty Excess of Loss Reinsurance programmes renewed at an average weighted rate increase of approximately 14 per cent. When combined with the flat to marginal rate decreases seen for these programmes earlier in the year, Property Treaty Excess of Loss pricing increased by a weighted average of approximately 6 per cent for the full year, with all catastrophe-exposed business classes increasing 4 per cent in the aggregate.

The International and US Direct and Facultative Property classes, written by the London and international offices, saw significant rate increases on loss impacted accounts, rising by 10 per cent and 4 per cent, respectively, for the full year.  In addition, the Group's Energy account saw some pricing corrections primarily driven by the renewal of loss-impacted accounts; the average aggregate rate increase was 4 per cent.

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

Rating indexes for product groups 1999-2011

	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Aerospace	106%	111%	114%	107%	109%	121%	130%	134%	134%	135%	116%	107%	100%
Casualty	201%	197%	203%	197%	204%	215%	227%	236%	222%	171%	138%	101%	100%
Energy/Marine	255%	250%	248%	230%	245%	255%	228%	224%	220%	186%	135%	107%	100%
Property	200%	195%	197%	191%	206%	219%	194%	198%	203%	188%	137%	107%	100%
Reinsurance	242%	234%	237%	219%	232%	230%	192%	190%	188%	170%	123%	105%	100%
Specialty/War & Political Risk	196%	201%	210%	205%	200%	207%	210%	217%	221%	209%	145%	104%	100%

Rating index base: 100 per cent in 1999

Average weighted rate movements by product group for the past two years are shown in the table below.

Average weighted premium rate movements by product group 2010-2011

	2011	2010
Aerospace	(5%)	(3%)
Casualty	2%	0%
Energy/Marine	2%	1%
Property	2%	(1%)
Reinsurance	3%	(1%)
Specialty/ War & Political Risk	(2%)	(4%)

Aerospace classes of business continued to suffer from continued competition following another relatively benign loss year for the Aviation industry. This suggests that there could likely be further pressure on rates during 2012.

Overall, average weighted rates for Casualty classes increased marginally during 2011. This was primarily due to the impact of the Group's Motor portfolio, for which rates increased by approximately 11 per cent in line with wider market conditions. On average, rates for most Casualty classes either decreased slightly or remained flat. However, there were indications of some upward rating pressure.

Aggregate rates for Speciality/War & Political Risks classes of business continued to decrease. Benign loss experience in Terrorism and Credit business classes also resulted in downwards rate pressure.  In addition, the Credit account suffered from the influx of new capacity that followed rate increases in the aftermath of the 2008 credit crisis.

Gross premiums written

Gross premiums written by the Group increased by 11 per cent to US$4.5 billion during 2011 (2010: US$4.1 billion).

As in recent years, the bulk of this growth was produced by Catlin's underwriting hubs in Bermuda, the United States, the Asia-Pacific region, Europe and Canada.  Gross premiums written by the non-London/UK hubs increased by 24 per cent. The non-London/UK hubs accounted for 48 per cent of the Group's 2011 gross premiums written (2010: 43 per cent), demonstrating the Group's investment in its international infrastructure and these hubs' ability to grow organically. 

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

Gross premiums written by financial reporting segment 2007-2011 (US$m)

	2011	2010	2009	2008	2007
London	2,342	2,323	2,347	2,428	2,605
Bermuda	549	502	421	392	312
US	852	707	581	348	297
International	770	537	366	269	147
Total	4,513	4,069	3,715	3,437	3,361

In recent years gross premiums written by the London/UK hub have decreased primarily due to increasing competition for London wholesale business and Catlin's underwriting discipline. However, the London/UK hub's volume increased by 1 per cent during 2011, primarily driven by rate increases in loss-impacted classes (such as Property Treaty Excess of Loss Reinsurance), reinstatement premiums and the development of new opportunities in classes with improving pricing, such as Motor. However, rates continued to decrease in some classes of London wholesale business, notably Aerospace classes.

The Bermuda hub produced a 9 per cent increase in gross premiums written.  This increase was driven in part by improved pricing and terms during mid-year Property Treaty renewals, the impact of loss-triggered reinstatement premiums, the purchase of back-up policies and growth in Agricultural Reinsurance, a global Catlin specialty.

The 21 per cent growth in gross premiums written by the US hub was driven in part by the Miami office, which was established in 2010 to develop Treaty Reinsurance business in Central and South America as well as further Agricultural reinsurance opportunities. In addition, growth was produced by a new Energy underwriting team in Philadelphia as well as opportunistic growth in niche and specialist Casualty lines.

The International reporting segment includes the Asia-Pacific, Europe and Canada underwriting hubs. The proportion of the International segment's gross premiums written attributable to each of these hubs is shown in the table below.

Gross premiums written by international underwriting hubs 2007-2011 (US$m)

	2011	2010	2009	2008	2007
Asia-Pacific	304	217	129	105	67
Europe	354	229	175	111	39
Canada	112	91	62	53	41
Total	770	537	366	269	147

Gross premiums written by the Asia-Pacific hub increased by 40 per cent during 2011, with particularly strong growth in Australia and, China. The hub expanded its regional Property Treaty Reinsurance capabilities during the year, which places the hub in a good position to take advantage in 2012 of the improvements in rates and conditions for Property Treaties following the catastrophe events in the region.

The largest increase in gross premiums written - 55 per cent - was reported by the Europe underwriting hub. The growth was partly due to the establishment of Catlin Re Switzerland, which began underwriting with effect from 1 January 2011.  The European Reinsurance operation achieved both premium and profitability targets during its first year of operations.

Gross premiums written by the Canada underwriting hub increased by 23 per cent.  This growth was the result of several factors, including a full year of operations by the Montreal and Vancouver offices, which were established in late 2010.

Underwriting performance

Unsurprisingly, as a result of the catastrophe events of 2011, the Group's loss ratio increased to 70.0 per cent (2010: 57.5 per cent). However, Catlin's underlying underwriting performance, as measured by the attritional loss ratio, was strong.  Overall, the Group produced a net underwriting contribution of US$324 million (2010: US$683 million), despite incurring nearly US$1 billion in gross catastrophe losses.

An analysis of the components of the loss ratio in 2011 and 2010 is shown in the table below.

Components of loss ratio 2010-2011 (%)

	2011	2010
Attritional loss ratio	50.0%	51.6%
Catastrophe losses	21.3%	7.2%
Large single-risk losses	1.5%	3.2%
Release of reserves	(2.8%)	(4.5%)
Reported loss ratio	70.0%	57.5%

The attritional loss ratio - which excludes catastrophe and large single-risk losses and releases from prior year reserves - decreased to 50.0 per cent in 2011 (2010: 51.6 per cent), the lowest in the past five years. The reduction in the attritional loss ratio illustrates the flexibility of Catlin's underwriting portfolio, as the Group has moved away from classes of business that have performed poorly and added new classes to further diversify the portfolio. The Group regards this as a significant achievement considering the prevailing market conditions and the overall increase in premium volume.

Catastrophe losses, net of reinstatement premiums and reinsurance recoveries, including the Group's Catastrophe Aggregate protections, amounted to US$678 million (2010: $218 million).  Gross losses from catastrophes occurring during 2011 amounted to US$961 million.  The catastrophe events added 21.3 percentage points to the Group's 2011 loss ratio (2010: 7.2 percentage points).

The Group's outwards reinsurance programme performed as expected, reducing the second-half impact of the catastrophe losses to US$144 million. Limits remain to mitigate any foreseeable loss deterioration from the 2011 catastrophe events.

Large single-risk losses amounted to US$54 million net of reinsurance and reinstatement premiums (2010: US$98 million) and added 1.5 percentage points to the loss ratio during 2011 (2010: 3.2 percentage points).

Large single-risk losses are defined as losses arising from man-made causes that exceed expected severity for a given class ofbusiness, typically in excess of $10 million, gross of reinsurance. The Group sustained three large single-risk losses during 2011:  

·      an explosion and fire at a refinery in Alberta, Canada, in January;

·      damage to a floating energy production storage vessel located in the North Sea in February; and

·      the loss of a satellite that failed to reach proper orbit in August. 

Whilst large-single risk losses during 2011 were lower than in the past several years, the Group does not believe this constitutes the start of a trend.

The Group released US$103 million from prior year loss reserves during 2011 (2010: US$144 million), equivalent to 2 per cent of opening reserves (2010: 3 per cent).  The prior year reserve release reduced the 2011 loss ratio by 2.8 percentage points (2010: 4.5 percentage points).

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

Underwriting performance by hub 2010-2011 (US$m)

	London/UK	Bermuda	US	International	Group
2011
Gross premiums written	2,342	549	852	770	4,513
Net premiums written	1,916	502	726	691	3,835
Net premiums earned	1,891	471	636	614	3,612
Underwriting contribution	241	(66)	115	34	324
Loss ratio	65.1%	92.4%	63.5%	74.9%	70.0%
Attritional loss ratio	47.5%	32.8%	59.6%	60.8%	50.0%
2010
Gross premiums written	2,323	502	707	537	4,069
Net premiums written	1,830	438	572	478	3,318
Net premiums earned	1,827	427	538	427	3,219
Underwriting contribution	366	151	95	71	683
Loss ratio	57.6%	41.5%	64.8%	64.2%	57.5%
Attritional loss ratio	52.3%	29.5%	59.7%	60.2%	51.6%

The catastrophe losses sustained during 2011 had a significant impact on the loss ratio and underwriting contribution of the London/UK and Bermuda underwriting hubs, both of which write a significant proportion of the Group's Property Treaty Reinsurance portfolio.  The Asia-Pacific underwriting hub, part of the International reporting segment, also incurred sizable catastrophe claims.

The most significant reduction in the attritional loss ratio came in the London/UK hub. The attritional loss ratio for the US reporting segment also improved, which further demonstrated Catlin's underwriting discipline during a year in which market conditions were competitive for most non-Catastrophe classes of business.

Product groups

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

Gross written premiums by product group 2010-2011 (US$m)

Aerospace Product Group

	2011	2010
Aviation	352	400
Satellite	44	40
Total	396	440

Casualty Product Group

	2011	2010
General Casualty	326	316
Professional/Financial	379	391
Marine	83	87
Motor	135	48
Total	923	842

Energy/Marine Product Group

	2011	2010
Upstream Energy	213	191
Hull	140	147
Cargo	125	105
Specie	70	73
Downstream Energy	87	63
Energy Liability	54	28
Total	689	607

Property Product Group

	2011	2010
International	308	256
US	106	113
Binding Authorities	101	102
Total	515	471

Reinsurance Product Group

	2011	2010
Non Proportional Property	781	659
Proportional Property	365	293
Marine	119	105
Casualty	181	167
Specialty	147	65
Total	1,593	1,289

Specialty/War & Political Risks Product Group

	2011	2010
War & Political Risks, Terrorism & Credit	199	245
Accident & Health	121	92
Equine/Livestock	78	64
Contingency	12	19
Total	410	420

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

Underwriting results by product group (US$m)

	Gross premiums written	Net premiums written	Net premiums earned	Underwriting contribution	Loss ratio	Rate change
2011
Aerospace	396	315	338	101	51%	(5%)
Casualty	923	720	687	27	78%	2%
Energy/Marine	689	518	482	54	64%	2%
Property	515	428	404	53	58%	2%
Reinsurance	1,593	1,506	1,332	(75)	87%	3%
Specialty/War & Political Risks	410	367	387	180	32%	(2%)
2010
Aerospace	440	348	405	70	61%	(3%)
Casualty	842	651	647	(13)	87%	0%
Energy/Marine	607	464	447	92	55%	1%
Property	471	379	371	73	51%	(1%)
Reinsurance	1,289	1,102	1,043	303	52%	(1%)
Specialty/War & Political Risk	420	406	355	156	36%	(4%)

Catlin continued to carefully manage its Aerospace portfolio due to the continuation of challenging market conditions for these classes of business.  Gross Aerospace premiums written were reduced by 10 per cent, primarily driven by the non renewal of Airline and General Aviation accounts with insufficient rate adequacy. This reduction in volume was linked to an increase in underwriting contribution produced by the Aerospace account, which reflected both market loss experience and Catlin's focus on its core book of business.

The Group has continued to manage the Casualty portfolio carefully, focusing on specialty and niche retail classes of Casualty business for which pricing is more stable. Gross Casualty premiums written increased by 10 per cent, primarily driven by the development of the Group's Short-Tail Motor account.

Long-Tail Casualty business has increased modestly through selective growth outside the London wholesale market in areas where the Group saw adequate margins.  This growth broadly offset further reductions in the London wholesale book.

The proactive management of the Casualty portfolio has resulted in a reduction in the Casualty loss ratio to 78 per cent (2010: 87 per cent) and underwriting contribution of US$27 million (2010: US$13 million underwriting loss), despite some prior year reserve strengthening.

This restructuring of the Casualty portfolio over the past several years and the development of the Group's infrastructure outside the London wholesale market leaves Catlin well-positioned to take advantage of the inevitable market turn in the Casualty market.

Gross premiums written by the Energy/Marine product group increased by 14 per cent, primarily due to growth in international Offshore and Onshore Energy business, as well as the development of a US Energy Liability team.  Marine volume grew modestly, with growth in Cargo and US Marine business offset by small decreases in Hull and Specie volumes.

The Energy/Marine product group's loss ratio increased to 64 per cent (2010: 55 per cent). Despite the impact of the Deepwater Horizon explosion, the Energy loss ratio in 2010 was positively impacted by a larger than average prior year reserve release, skewing the comparison with 2011. Underwriting contribution decreased by 41 per cent to US$54 million (2010: US$92 million). Despite a slight increase in underlying loss ratios, Energy and Marine margins remain adequate, and these classes continue to develop as global products for the Group.

Property Insurance premiums increased by 9 per cent. The growth was the result of the expansion of London/UK and International Binding Authority business, growth in the Construction account and - later in the year - the first signs of rate increases for Property Insurance accounts following the series of natural catastrophes.

Not surprisingly, insurance claims arising from those catastrophes caused the Property product group's underwriting contribution to decrease by 27 per cent to US$53 million (2010: US$73 million). The Property loss ratio rose to 58 per cent (2010: 51 per cent).

The bulk of the Group's natural catastrophe losses in 2011 were incurred in the Reinsurance product group, which produced a negative underwriting contribution of US$75 million (2010: US$303 million underwriting contribution). The Reinsurance product group's loss ratio rose to 87 per cent (2010: 52 per cent).

The 24 per cent increase in Reinsurance gross premiums written was attributable to several factors, including significant reinstatement premiums paid by cedants following catastrophe events.  Also contributing to the increased volume were growth in Agricultural Reinsurance premiums, the establishment of Catlin Re Switzerland and growth in the Casualty Treaty Reinsurance account, particularly by the US underwriting hub where a newly established team is gaining traction.

Specialty & War/Political Risk volumes have remained broadly static year on year, due to the offsetting effects of an increase in Specialty volume and a decrease in War/Political Risk premiums.

The Group's Specialty business has continued to grow, in particular the Accident & Health portfolio and niche Aquaculture business. Conversely, War/Political Risk volume has decreased due to continued overcapacity in the Terrorism and Credit Insurance markets.  The overall reduction in these classes has been partially offset by the continued and successful development of related products, such as Product Recall, Piracy and Kidnap & Ransom.

The loss ratio for the Specialty & War/Political Risk portfolio improved slightly to 32 per cent (2010: 36 per cent), generating a 15 per cent increase in underwriting contribution  to US$180 million (2010: US$156 million).  Despite the overcapacity for Terrorism and Credit coverage, the overall result demonstrates the adequacy of pricing and conditions for many Specialty business classes as well as selective underwriting in classes which were impacted by the global financial crisis.

1 January 2012 renewal experience

Average weighted premium rates across Catlin's underwriting portfolio increased by 5 per cent for 1 January 2012 renewals. Rates for catastrophe-exposed classes rose by a weighted average of 9 per cent, whilst rates for non-catastrophe classes increased by 1 per cent.

Rate movements at 1 January 2012 by product group are shown in the table below.

Rate movements by product group at 1 January 2011 and 2012

	1 January 2012	1 January 2011
Aerospace	3%	1%
Casualty	2%	2%
Energy/Marine	3%	(1%)
Property	3%	1%
Reinsurance	7%	0%
Specialty/ War & Political Risk	0%	(2%)

Pricing for catastrophe classes was particularly strong at 1 January 2012, although positive signs were seen across a large number of non-correlated classes of business.

Average weighted premium rates for Reinsurance classes, the largest component of the 1 January renewals, increased by 7 per cent, largely driven by Property Treaty Excess of Loss business.  With the exception of Europe, rates increased for Property Treaty business across all regions, with rates for loss-impacted regions, especially Asia Pacific, showing the greatest increase. European renewals remained broadly flat, with the impact of new catastrophe model releases balanced by relatively benign loss experience. Overall, rates for US Property Treaty Excess of Loss Reinsurance increased by an average of 17 per cent, whist average rates for non-US Property Treaty classes rose by 12 per cent.

Rates in the Property product group increased for both International and US Direct and Facultative portfolios, as direct property classes start to follow the higher rates charged for reinsurance classes.

Although pricing is mixed across the Casualty portfolio, rates continued to increase for the Short-Tail Motor account, for which some business renewed at 1 January.

Rates also increased for Aerospace classes, a sector which has experienced rate softening since 2002.  However, the Group's 1 January 2012 renewals were dominated by one large account which was re-engineered for 2012.

Rates increased for all other product groups, although it should be noted that the 1 January renewal season is of less significance to non-Reinsurance classes.

Gross premiums written as at 31 January 2012 increased by approximately 10 per cent, which met the Group's expectations.

There is significant uncertainty regarding the losses arising from the grounding of the cruise ship Costa Concordia on 13 January 2012. Catlin currently estimates that its losses will amount to approximately US$35 million, net of reinsurance.

Outlook

Catlin is pleased with the marginally positive rate movements across non-catastrophe classes at 1 January 2012. Whilst these rate increases do not constitute a hard market, there is a growing sense that momentum for positive rate changes is building. This opinion is increasingly supported by external commentators.

The Group has seen rate increases for catastrophe classes, which we expect to continue at major renewal dates during 2012. More modest rate increases are likely for underlying insurance classes, most notably Property. The marketplace is changing, but it is not a changed marketplace.

The Thai flooding in the second half of 2011 is the first truly major insured Southeast Asian catastrophe claim. It will be interesting to see how the market responds to some of the challenges that a loss of this size brings.

Following some major restructuring over the past years, the Group's Casualty portfolio is well-positioned for a market correction. The UK Motor market has responded to poor performance with sizeable rate increases during the past 24 months. The UK Motor portfolio is continuing to grow as the Group expands its existing Motor Fleet portfolio and continues to develop a relationship with 'Insure the Box', a niche personal lines auto insurer on behalf of which Catlin provides underwriting capacity and in which Catlin has a 25 per cent shareholding. Rates for the remainder of the Casualty portfolio are broadly flat, with small increases for some Professional Lines accounts.

The Group anticipates that momentum will continue to build across Catlin's underwriting portfolio throughout 2012, as significant additional pricing increases will be required to offset the impact of reduced investment yields.

The global economic outlook remains uncertain, highlighted by the European sovereign debt crisis. This will affect Catlin as the majority of our business is underwritten in developed nations where economic growth is lagging. Aside from these economic concerns, a change is emerging in the traditional world order, as the influence and financial power of emerging or newly emerged economies create both threats and opportunities for established markets. These trends underscore Catlin's strategy to increase business in these markets through its international network of offices. 

Further creation of winners and losers in the property/casualty insurance industry, especially in the bottom quartile, is likely to lead to more business moving among insurers. This trend will increase the importance of underwriting fundamentals, such as distribution and technical excellence, that form the basis of Catlin's underwriting culture.

Despite the uncertainties faced by the industry, Catlin believes it is well-positioned for the next 12 months and beyond. The Group's international infrastructure is in place, has the capacity to respond when change occurs and is capable of producing further profitable growth, independent of market conditions. Our portfolio flexibility, both in terms of product and geography, can further enhance returns at this phase of the underwriting cycle.

Capital Management

Catlin strives to maintain an efficient level of economic capital with a strong focus on capital preservation consistent with the Group's risk appetite and current business plan.

Catlin controls downside risk to capital created by its diversified portfolio of underwriting and financial markets risk to ensure that the Group and all of its insurance carriers can benefit from the improved pricing environment in years following significant market events without necessarily raising  additional capital. The delivery of this strategy is supported by a robust risk and control framework. 

Catlin's risk appetite is a function of expected profit and available capital. In setting risk appetite it is recognised that there will be a trade-off between expected profit, risk to capital and the time horizon under consideration across risk categories (such as underwriting risk, reserving risk, financial markets risk, credit risk, operational risk).

One of Catlin's key aims is consistency and transparency of risk management and control across the entire Group, its insurance carriers and all risk categories.

Catlin controls its exposure via:

•    a diversified portfolio of underwriting and financial markets risks;

•    restricting aggregation;

•    exercising controls on key risks; and

•    risk mitigation of key underwriting and financial markets risks.

Catlin's rated underwriting entities have been assigned financial strength ratings of 'A' (Excellent) by A.M. Best and 'A' (Strong) by Standard & Poor's.  These superior ratings reflect these agencies' confidence in the Group's risk management framework and level of capital. Standard & Poor's has also rated Catlin's Enterprise Risk Management programme as 'Strong'.

Capital

The Group's capital position is analysed in the table below. Catlin believes that its capital position at 31 December 2011 is sufficient to mitigate the risk of the necessity to raise further capital following two 1-in-100-year insurance events. This would allow the Group to benefit from the improved pricing environment in such a scenario in subsequent years without necessarily raising capital,

Capital position (US$m)

	2011	2010
Paid-up capital (net of intangibles)	2,099	2,236
Preferred shares	590	590
Capital available for underwriting	2,689	2,826
Economic capital requirement1	2,362	2,349
Capital buffer to economic capital requirement	327	477
Capital buffer as % of economic capital requirement	14%	20%

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

2    At 31 December 2011 the Group also had $91 million (2010: US$93 million) in subordinated debt that is available to pay losses if required. The subordinated debt is not reflected in the available capital shown in the table.

Third-Party Capital

The Group has put in place for 2012 a number of strategic third-party capital arrangements. Our flexible capital structure has allowed us to easily introduce these arrangements, which the Group believes benefits both Catlin and the counterparties.

Three Special Purpose Syndicates have been established at Lloyd's for 2012 that provide whole-account quota share reinsurance to the Catlin Syndicate 2003. These agreements could be expanded in subsequent years by mutual agreement depending upon market circumstances.  The Special Purpose Syndicates are shown in the table below.

Table 3: Special Purpose Syndicates providing third-party capital in 2012

Syndicate number	Counterparty	Syndicate capacity
2088	China Reinsurance (Group) Corporation	£50 million
6111	Lloyd's Names	£60 million
6112	Everest Reinsurance Company	£27 million

The Group has also purchased an Adverse Development Cover that provides protection against the deterioration, subject to limits, of loss reserves relating to the Group's 2009 and prior underwriting years. The purchase of this coverage does not represent a change in the Group's reserving philosophy, but rather is intended to improve the efficiency of the Group's capital. If surplus emerges from reserves, the Group will benefit through a profit commission arrangement.

The third-party capital arrangements benefit the Group in several ways, including by:

·      increasing book value through fees for management expenses and commissions for profitable underwriting;

·      providing the Group with the flexibility to respond quickly to changing market circumstances, such as advantageous market conditions following a significant catastrophe event;

·      reducing total volatility of earnings for first-party capital relative to business volumes;

·      more efficient capital provision, particularly through the adverse development cover;

·      allowing the use of first-party capital for greater development of the Group's underwriting portfolio; and

·      facilitating the transfer of knowledge between the Group and participating counterparties in areas of mutual benefit.

The Group holds sufficient capital to achieve the business plan for 2012 without the third-party capital arrangements. However, these arrangements have been instigated at a modest level in 2011 to improve the Group's strategic options, increase the flexibility of the capital structure and lay the foundation for greater use when market circumstances warrant. These arrangements improve the Group's ability to react to changes in the market in a timely fashion for the benefit of shareholders.

Catlin continues to explore potential third-party capital arrangements and additional transactions could be made during 2012.

Regulatory requirements

Catlin is committed to full compliance with local regulatory and capital requirements in all relevant jurisdictions in which we operate.

Catlin is working with the Association of Bermuda Insurers and Reinsurers as the Bermuda Monetary Authority ('BMA') progresses to an enhanced risk-based capital approach. 

Catlin-managed syndicates at Lloyd's and Catlin UK (Catlin Insurance Company (UK) Ltd.) will be subject to the proposed Solvency II regulatory framework, although the date of implementation remains unclear. Work is in progress to meet these requirements. As part of this work, Catlin is actively participating in market working groups whose goals are to ensure compliance with the new regulatory regime when it is launched.

Reinsurance and risk transfer

The goals of Catlin's risk transfer programme are to reduce volatility with a focus on capital preservation and flexibility following major events or significant market corrections. The programme is viewed as a capital management tool and is designed and executed centrally in order to maximise effectiveness.

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 for claims.

The key elements of the risk transfer programme include:

·    risk transfer to capital markets and/or collateralised counterparties to diversify and improve counterparty financial security particularly for infrequent catastrophe or extreme loss scenarios;

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

·    proportional and facultative protection to enhance the Group's gross underwriting capacity and cycle management; and

·    consideration of the quality of security and willingness to pay.

Under the current risk transfer programme, recoveries are generally more likely in the second half of any calendar year as the programme is structured to reduce volatility of a full calendar year. Although some protection is purchased against single events, the core of the current programme is deliberately structured to protect the Group against an aggregation of significant catastrophe losses (with a focus on natural perils) from major zones. Once the aggregate of losses to the Group reaches a certain level, a significant portion of further losses are recoverable from the programme up to certain limits.

This is best illustrated by the performance of the reinsurance programme during 2011 when there were a significant number of catastrophic events. The table below shows the cumulative progression of the gross and net of reinsurance financial impact to the Group of the series of major catastrophe events during 2011.

Gross and net catastrophe losses 2011 (US$m)

		Gross catastrophe losses	Net catastrophe losses (after reinsurance recoveries and reinstatement premiums)
Six-month period ended 30 June		574	534
12-month period ended 31 December		961	678

Only a small amount of reinsurance recoveries were made during the first half as underlying deductibles on the Group's Catastrophe Aggregate programme were still being eroded. As further losses emerged during the fourth quarter, the gross impact to the Group deteriorated but recoveries from the Catastrophe Aggregate programme increased significantly as the underlying deductibles were substantially exhausted.

The Catastrophe Aggregate programme in 2012 is structured similarly but not identically to the 2011 programme.  The increased cost of the 2012 programme is largely offset by the increased underlying rates on the original business covered.

The core risk transfer programme structure is reviewed at least annually and could change materially in future years. The actual structure will depend on market availability and a consideration of the cost and benefits afforded by the programme.

The Group evaluates the financial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All reinsurers on our current programme 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.

The Group actively considers and monitors the insurance-linked securities market and may sponsor such transactions when appropriate.

The Group believes that its risk transfer philosophy maximises book value growth over time by retaining expected earnings volatility and transferring extreme volatility.

Aggregate management

Catlin underwrites classes of catastrophe-exposed business. The Group uses sophisticated modelling tools to manage 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

In previous years the Group has provided two tables of modelled output. The Data Model output reflected Catlin's interpretation of how external models and methods should be applied and were used internally for market-consistent comparisons and for regulatory returns.  However, due to uncertainties in the modelling, Catlin added further prudential margins to the modelled output to reflect the degree of uncertainty in any peril or scenario. This output was the Adjusted Data Model, which was used to monitor the Group's risk appetite, as guidelines in pricing inwards business, to influence outwards reinsurance purchasing strategy and as a key consideration in the assessment of required capital.

Significant changes to some of the underlying third-party modelling software utilised by the Group has brought the Data Model Output more in line with the Adjusted Data Model Output. The changes in the underlying software did not materially change the Group's view of the risk inherent in potential losses from these sources. Although Catlin continues to adjust for modelling deficiency and set certain risk appetite limits lower for certain perils due to the increased uncertainty for losses from those sources, these adjustments are less significant than in prior years.  The Group now utilises only the Adjusted Data Model output, which is shown in the table below.

Examples of catastrophe threat scenarios

Outcomes derived as at 1 October 2011 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	846	978	1,352	658	572
	Reinsurance effect 1	(491)	(608)	(996)	(464)	(431)
Modelled net loss		356	371	357	194	140
Modelled net loss as a percentage of capital available for underwriting 2		14.2%	14.8%	14.3%	7.8%	5.6%

1    Scenarios are shown after taking into account erosion of the underlying deductibles in the aggregate protections in place at 1 October 2011. If there were no erosion of the underlying deductibles in these programs, the largest net threat scenario would be 23 per cent of capital available for underwriting.

2    Capital available for underwriting amounted to US$2.5 billion at 30 June 2011; defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax.

Limitations

The modelled outcomes in Table 5 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.

Financial Review

The following pages contain commentary regarding Catlin's consolidated financial statements for the year ended 31 December 2011, which are prepared in accordance with Accounting Principles Generally Accepted in the United States ('US GAAP').

Consolidated Results of Operations (US$m)

	2011	2010	% change
Revenues
Gross premiums written	4,513	4,069	11%
Reinsurance premiums ceded	(678)	(751)	(10%)
Net premiums written	3,835	3,318	16%
Change in net unearned premiums	(223)	(99)	125%
Net premiums earned	3,612	3,219	12%
Net investment return	248	205	21%
Change in fair value of catastrophe swaps	-	(15)	N/M
Net gains on foreign currency	9	3	200%
Other income	4	2	100%
Total revenues	3,873	3,414	13%
Expenses
Losses and loss expenses	2,529	1,852	37%
Policy acquisition costs	759	684	11%
Administrative and other expenses	504	457	10%
Financing costs	10	15	(33%)
Total expenses	3,802	3,008	26%
Income before income taxes	71	406	(83%)
Income tax benefit/(expense)	11	(25)	N/M
Net income	82	381	(78%)
Preferred share dividend	(44)	(44)	-
Net income available to common stockholders	38	337	(89%)
Loss ratio1	70.0%	57.5%
Expense ratio2	32.6%	32.3%
Combined ratio3	102.6%	89.8%
Tax rate4	(15.6%)	6.3%
Return on net tangible assets5	1.7%	16.3%
Return on equity 6	1.3%	12.5%
Total investment return 7	3.1%	2.7%

N/M   Not meaningful

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

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

3       Total of loss ratio plus expense ratio

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

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

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

7       Calculated as total investment income divided by average invested assets during the year

Catlin's income before tax amounted to US$71 million in 2011, an 83 per cent reduction compared with the previous year (2010: US$406 million). This result was influenced by several key factors:

·      An 11 per cent increase in gross premiums written to US$4.5 billion;

·      A 12 per cent increase in net premiums earned to US$3.6 billion;

·      A 53 per cent decrease in net underwriting contribution to US$324 million, reflecting an increased loss ratio of 70.0 per cent (2010: 57.5 per cent). The 2011 loss ratio has been heavily impacted by catastrophe losses (US$961 million gross, US$678 million net of reinsurance and reinstatement premiums) (2010: US$235 million gross; US$218 million net of reinsurance and reinstatement premiums).

·      The attritional loss ratio of 50.0 per cent was the lowest since 2007 (2010: 51.6 per cent).

·      An investment return of 3.1 per cent (2010: 2.7 per cent).

Consolidated Results of Operations

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

Income before income taxes (US$m)

	2011	2010	% change
Net underwriting contribution	324	683	(53%)
Total investment return	256	212	21%
Administrative expenses - controllable	(352)	(289)	22%
Administrative expenses - non controllable	(68)	(67)	1%
Administrative expenses - corporate	(84)	(101)	(17%)
Financing and other	(14)	(35)	(60%)
Foreign exchange	9	3	200%
Income before income taxes	71	406	(83%)

The following commentary compares the Group's 2011 financial results with the results for 2010.

With the exception of administrative expenses, the impact of year-to year changes using constant exchange rates is insignificant. The impact on administrative expenses is explained in the analysis of the expense ratio.

Gross premiums written

Gross premiums written increased by 11 per cent to US$4.5 billion (2010: US$4.1 billion).

Gross premiums written by the Group's Bermuda, US, Asia-Pacific, European and Canadian underwriting hubs increased substantially, rising by 24 per cent to US$2.2 billion (2010: US$1.7 billion).  These underwriting hubs accounted for 48 per cent of the total gross premiums written by the Group (2010: 43 per cent).

Gross premiums written by the London/UK underwriting hub increased by 1 per cent to US$2.34 billion (2010: US$2.32 billion).

Rates increased slightly during the period for many classes of business following the record number of catastrophe events during the year, with average weighted premium rates rising by 2 per cent.  Rates for catastrophe-exposed classes of business increased by a weighted average of 4 per cent, whilst average weighted premium rates for non-catastrophe classes were flat.

Seventy-three per cent of gross premiums written were denominated in US dollars, 10 per cent in euros, and 17 per cent in sterling and other currencies.

Reinsurance

Reinsurance premiums ceded decreased by US$73 million to US$678 million (2010: US$751 million). Reinsurance premiums ceded are analysed in the table below.

Reinsurance premiums ceded (US$m)

	2011	Percentage of GPW	2010	Percentage of GPW
Third-party protections	678	15.0%	753	18.5%
Names' quota share	-	0.0%	(2)	0.0%
Reinsurance premiums ceded	678	15.0%	751	18.5%
Element of multi-year contracts relating to future periods	(25)	(0.6%)	(76)	(1.9%)
Adjusted reinsurance premiums ceded	653	14.4%	675	16.6%

Third-party reinsurance costs expressed as a percentage of written premiums were 3.5 percentage points lower than in 2010. The decrease was attributable to the purchase of fewer contracts.  In addition, a number of these contracts provide coverage for 2011 and future years. The element of the multi-year contracts which relates to future periods was approximately US$25 million in 2011 (2010: US$76 million).

Net premiums earned

Net premiums earned increased by 12 per cent to US$3.6 billion (2010: US$3.2 billion). This increase, which was in line with the Group's expectations, was due to both the increase in gross premiums written and the reduction in reinsurance premiums ceded during 2011.

Losses and loss expenses

The Group's loss ratio increased to 70.0 per cent during 2011 (2010: 57.5 per cent) on account of the unprecedented series of natural catastrophe losses sustained during the year.

The Group incurred eight catastrophe losses in 2011:

·      Australian floods in January;

·      the New Zealand earthquake in February;

·      the Japan earthquake/tsunami in March;

·      tornadoes which caused extensive damage in portions of the US Midwest and South in April and May;

·      severe storms in Copenhagen in July;

·      Hurricane Irene, which caused damage to portions of the Caribbean, United States and Canada in August; and

·      the Thai floods which occurred throughout the second half of 2011.

Gross losses relating to these catastrophe losses amounted to approximately US$961 million ($678 million net of reinsurance and reinstatement premiums), impacting the loss ratio by 21.3 percentage points.

The components of the Group's loss ratio in 2011 are analysed in the table below.

Analysis of loss ratio

	2011	2010
Attritional loss ratio	50.0%	51.6%
Catastrophe losses	21.3%	7.2%
Large single-risk losses	1.5%	3.2%
Release of reserves	(2.8%)	(4.5%)
Reported loss ratio	70.0%	57.5%

Large single-risk losses impacted the loss ratio by 1.5 percentage points in 2011 (2010: 3.2 percentage points).

The Group released US$103 million from prior year loss reserves during 2011, an amount equating to 2 per cent of opening reserves (2010: US$144 million or 3 per cent). The level of reserve releases made has been broadly consistent since the Group's initial public offering in 2004.

Net underwriting contribution

The 2011 net underwriting contribution of US$324 million represents a 53 per cent decrease compared with the previous year (2010: US$683 million). Of the total underwriting contribution, 74 per cent was produced by the London/UK underwriting hub; 26 per cent was produced by the Group's other underwriting hubs (2010: 54 per cent London, 46 per cent other). However, if the impact of catastrophe losses is excluded, 55 per cent of the underwriting contribution was produced by the London/UK underwriting hub (2010: 53 per cent), with 45 per cent produced by the other hubs (2010: 47 per cent).

Policy acquisition costs, administrative and other expenses

The expense ratio amounted to 32.6 per cent (2010: 32.3 per cent). The components of the expense ratio and corporate expenses are analysed in the table below.

Analysis of expense ratio

US$m	2011	Components  of expense  ratio	2010	Components of  expense ratio
Policy acquisition costs	759	21.0%	684	21.3%
Administrative expenses
Controllable expenses	352	9.7%	289	9.0%
Non controllable expenses	68	1.9%	67	2.0%
Corporate expenses	84	-	101	-
Administrative and other expenses	504	11.6%	457	11.0%
	1,263	32.6%	1,141	32.3%

The policy acquisition cost ratio decreased to 21.0 per cent (2010: 21.3 per cent). Administrative expenses represent 11.6 percentage points of the overall expense ratio (2010: 11.0 percentage points).  Approximately 0.3 percentage points of the increase in 2011 is attributable to foreign exchange movements as a result of converting sterling expenses into US dollars at an average rate of $1.60 in 2011 compared to $1.55 in 2010.

When calculating the expense ratio, Catlin excludes some corporate expenses such as profit-related bonuses, employee share option schemes and certain Group corporate costs to allow the expense and combined ratios to provide a closer representation of the costs of underwriting.

Total investment return

Total investment return amounted to 3.1 per cent (2010: 2.7 per cent). The table below summarises the total investment return during the year.

Total investment return (US$m)

	2011	2010
Total investments and cash as at 31 December	8,388	8,021
Investment income	156	147
Net gains on fixed maturities and short-term investments	102	46
Net (losses)/gains on other invested assets	(2)	19
Total investment return	256	212
Investment expenses	(8)	(7)
Net investment return	248	205

Change in fair value of catastrophe swaps

During 2010 the Group held a catastrophe swap which provided coverage in the event of one or more natural catastrophes. The Group's counterparty in the catastrophe swap was Newton Re, a special purpose vehicle. The catastrophe swap expired during 2010 without being triggered. No catastrophe swaps were held at 31 December 2011 and 2010.

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

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

	2011	2010
Premiums in respect of catastrophe swaps	-	(14)
Change in value of catastrophe swaps	-	(1)
	-	(15)

Net gains on foreign currency

Catlin reported a gain on foreign currency exchange amounting to US$9 million (2010: US$3 million). Catlin reports in US dollars but undertakes significant transactions in various currencies. Exchange rate movements during the year have resulted in the net exchange gain on these currency positions.

Financing costs

Financing costs amounted to US$10 million (2010: US$15 million). Financing costs comprise interest and other costs in respect of bank financing, together with costs of subordinated debt.  Dividends relating to preferred shares are treated as an appropriation of net income and are not included in financing costs.

Income tax

The Group's effective tax rate was negative 15.6 per cent (2010: 6.3 per cent). A driver of the effective tax rate continues to be the jurisdiction of the underwriting entities in which profits and losses arise.

The negative tax rate arises due to a $19 million deferred tax benefit, attributable to a 2 per cent reduction in the UK corporation tax rate to 25 per cent which will be applicable from April 2012. The effect of this change is reflected in the deferred tax provisions made for 2011.

Net income available to common stockholders

After payment of dividends amounting to US$44 million to holders of Catlin's non-cumulative perpetual preferred shares (2010: US$44 million), net income available to common shareholders amounted to US$38 million (2010: US$337 million). The return on net tangible assets was 1.7 per cent (2010: 16.3 per cent); the return on equity amounted to 1.3 per cent (2010: 12.5 per cent).

Balance sheet

A summary of the balance sheet at 31 December 2011 and 2010 is set out in the table below.

Summary of Consolidated Balance Sheet (US$m)

	2011	2010	% change
Investments and cash	8,388	8,021	5%
Intangible assets and goodwill	717	716	-
Premiums and other receivables	1,679	1,322	27%
Reinsurance recoverable	1,188	1,039	14%
Reinsurance recoverable on paid losses	29	190	(85%)
Deferred policy acquisition costs	398	354	12%
Other assets	560	440	27%
Loss reserves	(6,467)	(5,549)	17%
Unearned premiums	(2,119)	(1,886)	12%
Subordinated debt	(91)	(93)	(2%)
Reinsurance payable	(415)	(559)	(26%)
Other liabilities	(569)	(547)	4%
Stockholders' equity	3,298	3,448	(4%)

The major items on the balance sheet are analysed below.

Investments and cash

Investments and cash increased by 5 per cent to US$8.4 billion (2010: US$8.0 billion). The increase is driven by cash flow from the Group's insurance operations and positive investment performance.

Intangible assets and goodwill

In line with management's focus on underwriting hubs, intangible assets have been attributed to segments to match those assets to relevant business flows.

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

Intangible assets and goodwill (US$m)

	2011	2010
Purchased Lloyd's syndicate capacity	634	634
Distribution network	-	1
Surplus lines licenses	6	5
Goodwill on acquisition of Wellington	60	60
Other goodwill	17	16
Intangible assets and goodwill	717	716
Associated deferred tax (included within other liabilities)	(108)	(94)
Intangible assets and goodwill net of deferred tax	609	622

Premiums and other receivables

Premiums and other receivables increased during 2011 by 27 per cent to US$1.7 billion (2010: US$1.3 billion).  The increase was due to the increase in gross premiums written, including a significant amount of reinstatement premiums arising as a result of the catastrophe losses incurred in the year.

Reinsurance recoverable

Amounts receivable from reinsurers increased by 14 per cent to US$1.2 billion (2010: US$1.0 billion). Reinsurance recoverables represent 36 per cent of stockholders' equity (2010: 30 per cent). 

Reinsurance recoverable on paid losses

Anticipated recoveries decreased by 85 per cent to US$29 million (2010: US$190 million) following a commutation and settlement of the quota share reinsurance provided to the Catlin Syndicate at Lloyd's (Syndicate 2003) by the former Wellington Names for the 2008 underwriting year of account.

Deferred policy acquisition costs

Deferred policy acquisition costs represented 19 per cent of unearned premiums at 31 December 2011 (2010: 19 per cent).

Loss reserves

Gross loss reserves have increased by 17 per cent to US$6.5 billion (2010: US$5.5 billion). Approximately 95 per cent of net reserves relate to the 2003 and later accident years. The Group released US$103 million from prior year loss reserves during 2011, an amount equal to approximately 2 per cent of opening net reserves.

Unearned premiums

Unearned premiums increased by 12 per cent to US$2.1 billion (2010: US$1.9 billion).  The increase in unearned premiums is the result of Catlin's growth in gross premiums written in recent years.

Notes payable and subordinated debt

Subordinated debt represented a total of US$68 million and €18 million in variable rate unsecured subordinated notes. The interest payable on the notes is based on market rates for three-month deposits in US dollars plus a margin of up to 317 basis points. The notes, which were redeemable in 2011 at the earliest, qualify as 'Lower Tier II' capital under the rules of the Financial Services Authority in the UK.

There was no change to the subordinated debt during the year, and the balance sheet movement primarily represented foreign exchange revaluation.

Reinsurance payable

Reinsurance payable has decreased by 26 per cent to US$415 million (2010: US$559 million).  This decrease relates to the commutation and settlement of the quota share reinsurance of the Catlin Syndicate provided by the former Wellington Names.

Stockholders' equity

The table below shows the principal components of the change in stockholders' equity during 2011 and 2010:

Change in stockholders' equity (US$m)

	2011	2010
Stockholders' equity, 1 January	3,448	3,278
Net income	82	381
Other comprehensive (loss) / gain	(42)	5
Common share dividends declared	(150)	(138)
Preferred share dividends declared	(44)	(44)
Stock compensation and other	4	(34)
Stockholders' equity, 31 December	3,298	3,448

The other comprehensive loss is largely comprised of currency translation losses.  These result from the significant portion of the Group's stockholders' equity being represented by non-US dollar entities within the Group. Non-US dollar 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 loss arises when the net assets of these companies are translated at year-end into the Group's reporting currency, which is US dollars.

In January 2007 Catlin Bermuda issued US$600 million of non-cumulative perpetual preferred shares. Dividends are paid semi-annually at a rate of 7.249 per cent up to 2017, at which time the dividends become payable at a floating rate of 2.975% plus three-month LIBOR. These shares represent a capital instrument which is eligible as regulatory capital for Catlin Bermuda.

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

Net tangible assets (US$m)

	2011	2010
Total stockholders' equity	3,298	3,448
Less: attributable to preferred shares	(590)	(590)
	2,708	2,858
Less: intangible assets	(609)	(622)
Net tangible assets	2,099	2,236
Book value per share (US$)	$7.85	$8.34
Book value per share (sterling)	£5.06	£5.41
Net tangible assets per share (US$)	$6.08	$6.53
Net tangible assets per share (sterling)	£3.93	£4.24

Investments

Total return on Catlin's average cash and investments of US$8.3 billion during 2011 amounted to 3.1 per cent (2010: 2.7 per cent). Total investment income amounted to US$256 million, a 21 per cent increase (2010: US$212 million). 

The good performance compared with 2010, despite continued global uncertainty during the year, resulted from the appreciation of the fixed income portfolio as interest rates declined, the active management of credit and sovereign risk within the fixed income portfolio and the increased allocation to fixed income which increased the duration of the portfolio and further allowed it to benefit from the fall in interest rates.

At the beginning of 2011, the Group added to its corporate bond holdings and later in the year reduced those holdings in rallying markets.  Exposure to commercial mortgage-backed securities was also reduced. Proceeds were reinvested into the core fixed income portfolio. 

Risk arising from holdings in the banking sector bonds was reduced by selling down unsecured European bonds and increasing exposure to secured and covered bonds.

Investment performance

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

Contribution to total investment return (US$m)

	2011	2010
Interest income	$156	$147
Net gains on fixed maturities and short-term investments	102	46
Net (losses)/gains on other invested assets	(2)	19
Total investment return	256	212

Investment performance in 2011 is analysed by major asset category in the table below.

Investment performance by major asset category (US$m)

	31 Dec 2011 allocation	2011 average allocation	2011 average allocation %	Return	Return %
Fixed income	6,019	5,393	65.0%	225	4.2%
Cash & short-term investments	2,178	2,737	33.0%	32	1.2%
Other invested assets	181	162	1.9%	(2)	(1.0%)
Overlays	10	11	0.1%	1	N/M
Total	8,388	8,303	100.0%	256	3.1%

The return on the fixed income portfolio reflects unrealised gains from the decline in interest rates over the course of 2011 and as well as spread movements on corporate bonds and mortgage backed securities. The other invested assets comprise funds, equities, loans and private equity.

Investment portfolio

Catlin's total cash and investments increased by 5 per cent during 2011 to US$8.4 billion (2010: US $8.0 billion).

The Group's investment portfolio remains liquid and conservatively positioned, in the light of continued global economic uncertainty. Cash, cash equivalents and short-term investments accounted for 26 per cent of the portfolio at 31 December 2011 (2010: 41 per cent). Forty-five per cent of these investments is held in money market funds and short-term bonds, 35 per cent is held in bank deposits, and the remainder is managed by Lloyd's in respect of regulatory overseas deposits.  

Liquid assets - which are defined as cash, government securities and fixed income securities with less than six months until maturity - accounted for 62 per cent of the portfolio (2010: 67 per cent).

The other invested assets comprise US$104 million relating to direct investments and co-investments with select investment partners, equities and bonds and US$77 million of hedge funds for which redemption notices have been issued. 

The Group's asset allocation to fixed income investments increased to 72 per cent of total cash and investments (2010: 57 per cent). A breakdown by sector is shown in the table below.

Detailed asset allocation (US$m)

	2011	2010
Fixed income investments
US government and agency securities	20%	13%
Non-US government and agency securities	16%	13%
Agency mortgage-backed securities	9%	6%
FDIC-backed corporate bonds	1%	4%
Asset-backed securities	7%	4%
Corporate bonds	17%	15%
Commercial mortgage-backed securities	1%	2%
Non-agency mortgage-backed securities	1%	-%
	72%	57%
Cash and short-term investments	26%	41%
Other invested assets	2%	2%
Total	100%	100%

Asset quality

Catlin's fixed income portfolio at 31 December 2011 consisted of high-quality assets, with 98 per cent of the portfolio invested in government/agency securities or instruments rated 'A' or higher (2010: 97 per cent).  The quality of the Group's fixed income portfolio is analysed in the table below.

Fixed income investments by rating at 31 December 2011 (US$m) ¹

	Government/ agency	AAA	AA	A	BBB	Non Inv grade	Assets
US government & agencies	28%	--	--	--	--	--	1,702
Non-US government & agencies	22%	--	--	--	--	--	1,326
Agency-mortgage-backed securities	13%	--	--	--	--	--	748
FDIC-backed corporate bonds	1%	--	--	--	--	--	60
Asset-backed securities	--	10%	--	--	--	--	602
Non-agency mortgage-backed securities	--	*	*	--	--	*	47
Commercial mortgage-backed securities	--	--	--	*	*	1%	65
Corporate bonds	--	4%	12%	8%	1%	*	1,469
Total	64%	14%	12%	8%	1%	1%	6,019

1    Excludes US$8 million relating to interest rate derivative contracts and US$2 million relating to credit default options.

*     Less than 0.5 per cent

Exposure to bonds issued by banks, included within corporate bonds in the table, amounted to 4.3 per cent of our total cash and investments at 31 December 2011, of which one-third was secured or covered.

The Group did not have any direct sovereign exposure to the governments of Portugal, Italy, Ireland, Greece and Spain in its investment portfolio at 31 December 2011.

Duration positioning

The duration of the Group's insurance liabilities was 2.7 years at 31 December 2011, which resulted in a liability benchmark duration (including shareholders' funds) of 2.4 years. The duration of the fixed income portfolio at 31 December 2011 was 2.5 years (2010: 2.5 years).  The duration of total cash and investments was 1.8 years (2010: 1.5 years) and therefore was short of the liability benchmark. The duration of the portfolio was extended through the year as cash was allocated to the fixed income portfolio, but was kept short of the liability benchmark in the expectation that interest rates will rise. Overlays have been put in place to protect the portfolio against significant movement in interest rates and to manage credit risks actively.

The yield to maturity on the fixed income portfolio was 1.4 per cent at 31 December 2011 (2010: 1.8 per cent).

Investment strategy

The Group's investment portfolio at 31 December 2011 reflects the revised investment strategy that was implemented during 2010.  This strategy aims to maximise economic value whilst minimising downside risk to capital and controlling earnings volatility.  The investment strategy operates within a comprehensive market risk framework that is based on capital, liquidity and risk-adjusted returns and is independently overseen by Catlin's Risk Management team.

Under this strategy, a significant majority of Catlin's investments comprise a core portfolio of highly rated sovereign, agency and corporate bonds and AAA-rated short-duration asset-backed securities. The core portfolio is aligned with the profile of the Group's liabilities and managed by a select group of external managers and a newly established in-house team.  Ninety-eight per cent of fixed income investments were managed under the Group's core investment guidelines at 31 December 2011.

Tactical investments are implemented through a select group of specialist managers and an in-house special situations team established to pursue a concentrated portfolio of primarily corporate investments across the capital structure on a partially hedged basis.

Catlin will pursue opportunities, as they arise, that exploit the Group's high levels of liquidity and its balance sheet capacity to invest with a longer-term horizon, capture liquidity premium and benefit from dislocations. 

As part of the investment strategy, the Group uses overlays to manage portfolio and macro-economic risks efficiently.  As at 31 December 2011, the Group has in place options which provide protection in the event of a significant movement in interest rates during 2012 and to provide protection against significant levels of credit spread widening.

The Group's investment team has been strengthened during the year and comprises 16 professionals who, together with ongoing investment in systems and processes, enable the Group to manage a proportion of the investments in-house.  At 31 December 2011 US$2.6 billion was managed by the in-house team.

Outlook

Catlin will continue to focus on capital preservation and will seek opportunities that offer attractive risk-adjusted returns whilst maintaining the flexibility to capitalise on dislocations that may occur amid the on-going uncertainty in financial markets.  Whilst interest rates are expected to remain at historic low levels for an extended period, the Group's portfolio is well-positioned to perform under a variety of economic scenarios. The in-house capabilities established during the past year provide a strong platform to actively manage portfolio risks, capture risk and liquidity premiums on a systematic basis, and provide the Group with better real time insights into market developments.

Loss Reserve Development

Reserves for losses and loss expenses

Catlin adopts a consistent reserving philosophy, taking into account the inherent uncertainties in estimating insurance liabilities.

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:

·      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 major events;

·      Movements in industry benchmarks;

·      The incidence of incurred claims;

·      The extent to which all claims have been reported;

·      Changes in the legal environment;

·      Damage awards; and

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

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

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

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

Estimate of reinsurance recoveries

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

Development of reserves for losses and loss expenses

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

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

All historic premium and claim amounts have been restated using exchange rates as at 31 December 2011 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 acquisition of Wellington Underwriting plc 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 most accident years, reserves have developed slightly better than the assessments made at the previous year-end. The reserves from the 2002 and prior accident years represent 4 per cent of the Group's net reserves at 31 December 2011.

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

Summary of Catlin Group net reserves at 31 December 2011 (US$m)
Accident Year	Catlin net reserves	Legacy Wellington net reserves	Total net reserves	Percentage of total net reserves
2002 and prior	79	126	205	4%
2003	36	57	92	2%
2004	39	62	101	2%
2005	61	97	157	3%
2006	72	114	186	4%
2007	265	18	283	5%
2008	437	3	440	8%
2009	852	-	852	16%
2010	1,071	-	1,071	20%
2011	1,810	-	1,810	34%
Sub-total	4,721	476	5,197	98%
Other net reserves1			83	2%
Total net reserves			5,279	100%

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

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	2010	2011	Total
Net premiums earned				929	1,167	1,199	1,348	2,740	2,545	2,914	3,203	3,612
Net ultimate excluding major events
Initial estimate1	5,943		1,545	424	544	588	632	1,372	1,542	1,814	1,681	1,766
One year later	5,915		1,563	408	480	532	591	1,429	1,511	1,774	1,652
Two years later	5,823		1,575	380	458	490	577	1,406	1,502	1,763
Three years later	5,829		1,616	380	432	469	562	1,393	1,477
Four years later	5,741		1,630	369	421	464	556	1,398
Five years later	5,732		1,633	367	427	457	556
Six years later			1,645	370	418	460
Seven years later			1,637	358	412
Eight years later			1,635	354
Net ultimate loss ratio excluding major events
Initial estimate1				45.6%	46.6%	49.0%	46.9%	50.1%	60.6%	62.2%	52.5%	48.9%
One year later				43.9%	41.1%	44.4%	43.8%	52.2%	59.4%	60.9%	51.6%
Two years later				40.9%	39.3%	40.9%	42.8%	51.3%	59.0%	60.5%
Three years later				40.9%	37.0%	39.1%	41.7%	50.8%	58.0%
Four years later				39.7%	36.1%	38.7%	41.2%	51.0%
Five years later				39.5%	36.6%	38.1%	41.2%
Six years later				39.8%	35.8%	38.3%
Seven years later				38.5%	35.3%
Eight years later				38.1%
Net ultimate major events
Initial estimate1			20		116	334			274		283	771
One year later			20		117	386			286		279
Two years later			19		118	397			288
Three years later			19		117	401			284
Four years later			20		121	393
Five years later			28		120	412
Six years later			25		120	409
Seven years later			19		120
Eight years later			17
Net ultimate including major events
Initial estimate1	5,943		1,565	424	660	922	632	1,372	1,815	1,814	1,964	2,537
One year later	5,915		1,583	408	597	918	591	1,429	1,796	1,774	1,930
Two years later	5,823		1,594	380	577	887	577	1,406	1,790	1,763
Three years later	5,829		1,635	380	549	869	562	1,393	1,761
Four years later	5,741		1,650	369	542	858	556	1,398
Five years later	5,732		1,661	367	547	869	556
Six years later			1,670	370	537	869
Seven years later			1,656	358	532
Eight years later			1,652	354
Net ultimate loss ratio including major events
Initial estimate1				45.6%	56.6%	76.9%	46.9%	50.1%	71.3%	62.2%	61.3%	70.2%
One year later				43.9%	51.2%	76.6%	43.8%	52.2%	70.6%	60.9%	60.3%
Two years later				40.9%	49.4%	73.9%	42.8%	51.3%	70.3%	60.5%
Three years later				40.9%	47.0%	72.5%	41.7%	50.8%	69.2%
Four years later				39.7%	46.5%	71.5%	41.2%	51.0%
Five years later				39.5%	46.9%	72.5%	41.2%
Six years later				39.8%	46.0%	72.5%
Seven years later				38.5%	45.6%
Eight years later				38.1%
Cumulative net paid		5,277	1,573	319	494	808	484	1,115	1,321	911	859	727	13,887
Estimated net ultimate claims		5,732	1,652	354	532	869	556	1,398	1,761	1,763	1,930	2,537	19,084
Estimated net claim reserves		455	79	36	39	61	72	283	440	852	1,071	1,810	5,197
Other net reserves2													83
Booked reserves													5,279

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 unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and Life business.

Net paid losses (US$m) 

		Accident Year
	Wellington accident periods 2006 and prior	2002 and prior	2003	2004	2005	2006	2007	2008	2009	2010		2011
Net premiums earned			929	1,167	1,199	1,348	2,740	2,545	2,914	3,203		3,612
Net paid excluding major events
End of accident year1	3,790	1,089	95	127	119	156	352	312	361	408		447
One year later	4,144	1,215	171	222	225	267	586	677	704	704
Two years later	4,591	1,307	227	280	288	356	877	943	911
Three years later	4,978	1,361	256	311	344	416	1,025	1,048
Four years later	5,159	1,423	281	337	373	454	1,115
Five years later	5,277	1,458	304	354	390	484
Six years later		1,505	300	366	406
Seven years later		1,531	311	373
Eight years later		1,556	319
Net paid loss ratio excluding major events
End of accident year1			10.2%	10.9%	10.0%	11.5%	12.9%	12.3%	12.4%	12.7%		12.4%
One year later			18.4%	19.0%	18.8%	19.8%	21.4%	26.6%	24.2%	22.0%
Two years later			24.5%	24.0%	24.0%	26.4%	32.0%	37.1%	31.2%
Three years later			27.5%	26.7%	28.7%	30.8%	37.4%	41.2%
Four years later			30.2%	28.8%	31.1%	33.7%	40.7%
Five years later			32.7%	30.3%	32.5%	35.9%
Six years later			32.3%	31.3%	33.8%
Seven years later			33.4%	32.0%
Eight years later			34.3%
Net paid major events
End of accident year1		8		72	94			101		79		279
One year later		13		113	248			193		154
Two years later		15		116	347			251
Three years later		19		117	378			273
Four years later		19		119	393
Five years later		21		120	399
Six years later		21		120	402
Seven years later		19		120
Eight years later		17
Net paid including major events
End of accident year1	3,790	1,097	95	199	213	156	352	413	361	487		727
One year later	4,144	1,228	171	335	473	267	586	869	704	859
Two years later	4,591	1,322	227	396	635	356	877	1,194	911
Three years later	4,978	1,380	256	429	722	416	1,025	1,321
Four years later	5,159	1,442	281	455	767	454	1,115
Five years later	5,277	1,479	304	473	789	484
Six years later		1,527	300	486	808
Seven years later		1,549	311	494
Eight years later		1,573	319
Net paid loss ratio including major events
End of accident year1			10.2%	17.0%	17.8%	11.5%	12.9%	16.2%	12.4%	15.2%		20.1%
One year later			18.4%	28.7%	39.5%	19.8%	21.4%	34.2%	24.2%	26.8%
Two years later			24.5%	33.9%	52.9%	26.4%	32.0%	46.9%	31.2%
Three years later			27.5%	36.7%	60.2%	30.8%	37.4%	51.9%
Four years later			30.2%	39.0%	64.0%	33.7%	40.7%
Five years later			32.7%	40.6%	65.8%	35.9%
Six years later			32.3%	41.6%	67.4%
Seven years later			33.4%	42.3%
Eight years later			34.3%

1    End of accident year for 2002 and prior shown as at 31 December 2003; end of accident year for Wellington accident periods 2006 and prior are shown as at the date of business combination

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

Major Events

Events included in the major events sections of Tables 2 and 3

Accident year	Event
2002 & prior	World Trade Centre/US Terrorism 9/11
2004	Hurricane Charley
2004	Hurricane Frances
2004	Hurricane Ivan
2004	Hurricane Jeanne
2005	Hurricane Katrina
2005	Hurricane Rita
2005	Hurricane Wilma
2008	Hurricane Ike
2010	Chilean Earthquake
2010	Deepwater Horizon
2010	New Zealand Earthquake, Darfield
2010	Australian Floods, Central Queensland
2011	Australian Floods, Brisbane
2011	New Zealand Earthquake, Christchurch
2011	Japanese Earthquake
2011	Tuscaloosa Tornadoes
2011	Joplin Tornado
2011	New Zealand Earthquake, Sumner
2011	Hurricane Irene
2011	Danish Cloudburst
2011	Thai Floods

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

Commentary on development tables

·      Non-major events: Across the 2007 and prior years, in aggregate, there has been a small release from reserves. For the 2008 to 2010 accident years, reserve releases have resulted from a review of some of the assumptions used relating to the Casualty and Workers Compensation classes of business. The 2010 accident year has also benefited from better than anticipated development on Aerospace reserves.

·      Major events: Aggregate reserves for prior year major events have seen a small improvement.

Limitations

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

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

Management considers that the loss reserves and related reinsurance recoveries continue to be held at their 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.

Catlin Group Limited

Consolidated Balance Sheets

As at 31 December 2011 and 2010

US dollars in millions

	2011	2010
Assets
Investments      Fixed maturities, at fair value	$6,029	$4,577
Short-term investments, at fair value	115	594
Other invested assets, at fair value	181	200
Total investments	6,325	5,371
Cash and cash equivalents	2,063	2,650
Accrued investment income	39	33
Premiums and other receivables	1,679	1,322
Reinsurance recoverable on unpaid losses (net of bad debts)	1,188	1,039
Reinsurance recoverable on paid losses	29	190
Reinsurers' share of unearned premiums	286	276
Deferred policy acquisition costs	398	354
Intangible assets and goodwill	717	716
Unsettled trades receivable	55	-
Other assets	180	131
Total assets	$12,959	$12,082
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses	$6,467	$5,549
Unearned premiums	2,119	1,886
Reinsurance payable	415	559
Accounts payable and other liabilities	301	273
Subordinated debt	91	93
Unsettled trades payable	66	37
Deferred tax liability (net)	202	237
Total liabilities	$9,661	$8,634
	2011	2010
Stockholders' equity
Common stock	$4	$4
Preferred stock	590	590
Additional paid-in capital	1,959	1,955
Treasury stock	(105)	(105)
Accumulated other comprehensive loss	(226)	(184)
Retained earnings	1,076	1,188
Total stockholders' equity	3,298	3,448
Total liabilities and stockholders' equity	$12,959	$12,082

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

Approved by the Board of Directors on 8 February 2012

Stephen Catlin

Director

Benjamin Meuli

Director

Catlin Group Limited

Consolidated Statements of Operations

For the years ended 31 December 2011 and 2010

US dollars in millions, except per share amounts

	2011	2010
Revenues
Gross premiums written	$4,513	$4,069
Reinsurance premiums ceded	(678)	(751)
Net premiums written	3,835	3,318
Change in net unearned premiums	(223)	(99)
Net premiums earned	3,612	3,219
Net investment return	248	205
Change in fair value of catastrophe swaps	-	(15)
Net gains on foreign currency	9	3
Other income	4	2
Total revenues	3,873	3,414
Expenses
Losses and loss expenses	2,529	1,852
Policy acquisition costs	759	684
Administrative and other expenses	504	457
Financing costs	10	15
Total expenses	3,802	3,008
Net income before income tax	71	406
Income tax benefit/(expense)	11	(25)
Net income	82	381
Preferred stock dividend	(44)	(44)
Net income to common stockholders	$38	$337
Earnings per common share
Basic	$0.11	$0.98
Diluted	$0.11	$0.93

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

Catlin Group Limited

Consolidated Statements of Changes in Stockholders' Equity

For the years ended 31 December 2011 and 2010

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 2010	$4	$590	$1,938	$(62)	$(189)	$997	$3,278
Comprehensive income:
Net income to common stockholders	-	-	-	-	-	337	337
Other comprehensive income	-	-	-	-	5	-	5
Total comprehensive income	-	-	-	-	5	337	342
Stock compensation expense	-	-	23	-	-	-	23
Dividends	-	-	-	-	-	(138)	(138)
Deferred compensation obligation	-	-	8	-	-	(8)	-
Treasury stock purchased	-	-	-	(57)	-	-	(57)
Distribution of treasury stock held in Employee Benefit Trust	-	-	(14)	14	-	-	-
Balance 31 December 2010	$4	$590	$1,955	$(105)	$(184)	$1,188	$3,448
Comprehensive income:
Net income to common stockholders	-	-	-	-	-	38	38
Other comprehensive loss	-	-	-	-	(42)	-	(42)
Total comprehensive (loss)/income	-	-	-	-	(42)	38	(4)
Stock compensation expense	-	-	10	-	-	-	10
Stock options exercised	-	-	1	-	-	-	1
Dividends	-	-	-	-	-	(150)	(150)
Treasury stock purchased	-	-	-	(7)	-	-	(7)
Distribution of treasury stock held in Employee Benefit Trust	-	-	(7)	7	-	-	-
Balance 31 December 2011	$4	$590	$1,959	$(105)	$(226)	$1,076	$3,298

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

Catlin Group Limited

Consolidated Statements of Cash Flows

For the years ended 31 December 2011 and 2010

US dollars in millions

	2011	2010
Cash flows provided by operating activities
Net income	$82	$381
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation	18	16
Amortisation of net discounts of fixed maturities	46	26
Net gains on investments	(100)	(65)
Changes in operating assets and liabilities
Reserves for losses and loss expenses	924	224
Unearned premiums	240	155
Premiums and other receivables	(362)	(206)
Deferred policy acquisition costs	(46)	(65)
Reinsurance recoverable on unpaid losses	(148)	107
Reinsurance recoverable on paid losses	163	72
Reinsurers' share of unearned premiums	(11)	(56)
Reinsurance payable	(144)	(83)
Accounts payable and other liabilities	55	10
Deferred taxes	(36)	(9)
Other	(88)	102
Net cash flows provided by operating activities	593	609
Cash flows used in investing activities
Purchases of fixed maturities	(7,360)	(2,939)
Proceeds from sales of fixed maturities	5,743	2,051
Proceeds from maturities of fixed maturities	201	184
Net purchases, sales and maturities of short-term investments	475	195
Purchases of other invested assets	(74)	(44)
Proceeds from sales and redemptions of other invested assets	92	392
Net purchases and sales of property and equipment	(60)	(32)
Purchases of intangible assets	(3)	-
Net cash flows used in investing activities	(986)	(193)

	2011	2010
Cash flows used in financing activities
Dividends paid on common stock	(150)	(138)
Dividends paid on preferred stock	(44)	(44)
Purchase of treasury stock	(7)	(57)
Net cash flows used in financing activities	(201)	(239)
Net (decrease)/increase in cash and cash equivalents	(594)	177
Effect of exchange rate changes	7	(27)
Cash and cash equivalents - beginning of year	2,650	2,500
Cash and cash equivalents - end of year	$2,063	$2,650
Supplemental cash flow information
Taxes paid/(received)	$26	$(19)
Interest paid	$4	$3
Cash and cash equivalents comprise the following:
Cash at bank and in hand	$1,311	$2,215
Cash equivalents	$752	$435

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

Catlin Group Limited

Notes to the Consolidated Financial Statements

For the years ended 31 December 2008 and 2007

(US dollars in thousands, except for share amounts)

1   Nature of operations

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

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

The Group writes a broad range of products, including property, casualty, energy, marine and aerospace insurance and property, catastrophe and per-risk excess, non-proportional treaty, aviation, marine, casualty and motor reinsurance business. Risks are insured worldwide, although risks originating in the United States predominate. The Group currently operates in more than 50 offices in 21 countries.

2   Significant accounting policies

Basis of presentation

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

Principles of consolidation

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

Reporting currency

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

Fixed maturities and short-term investments

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

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

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

Other invested assets

The Group's other invested assets compromise investment in funds, equity securities and loan instruments.  The Group's other invested assets are carried at fair value. All gains or losses on other invested assets are included within net investment return in the Consolidated Statements of Operations.

Derivatives

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

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

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

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

Cash and cash equivalents

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

Securities lending

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

Premiums

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

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

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

Policy acquisition costs

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

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

Reserves for losses and loss expenses

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

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

Reinsurance

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

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

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

Intangible assets and goodwill

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

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

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

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

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

Other assets

Other assets include prepaid items, property and equipment, income tax recoverable and securities lending collateral.

Comprehensive income/(loss)

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

Foreign currency translation and transactions

Foreign currency translation

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

Foreign currency transactions

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

Income taxes

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

Stock compensation

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

Warrants

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

Pensions

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

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

New accounting pronouncements

In October 2010 the Financial Accounting Standards Board ('FASB') issued new accounting guidance specifying how costs associated with acquiring or renewing insurance contracts should be identified and capitalised.  This guidance is effective for periods beginning after 15 December 2011. Earlier adoption is permitted. Retrospective application is also permitted but not required. Catlin intends to adopt this updated accounting guidance from 1 January 2012 and does not expect the guidance to have a significant effect on the Group's financial position or results of operations.

In June 2011 the FASB issued an accounting standard update requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income.  The update is effective for years (including interim periods) beginning after 15 December 2011.The adoption of this accounting standard update will not have a significant impact on the Company's financial position or result of operations.

In September 2011 the FASB issued an accounting standard update on testing goodwill for impairment, effective for years beginning after 15 December 2011. By providing the option to perform a "qualitative" assessment to determine whether further impairment testing is necessary, the update aims to reduce the cost and complexity of performing the annual goodwill impairment test. The Company has adopted this accounting standard update, effective for the year ended 31 December 2011. The adoption of the new accounting standard update did not have a significant impact on the Company's financial position or result of operations.

In 2011 the Group adopted amendments to accounting guidance for fair value disclosures, which did not have a material impact on the Group's financial position or results of operations.

3   Segmental information

The Group determines its reportable segments by underwriting hubs, consistent with the manner in which results are reviewed by management.

The four reportable segments are:

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

·    Bermuda, which primarily underwrites reinsurance business;

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

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

At 31 December 2011 there were four significant intra-Group reinsurance contracts in place: a 53.25 per cent Quota Share, which cedes Catlin Syndicate risk to Catlin Re Switzerland; a 75 per cent quota share contract which cedes Catlin UK risk to Catlin Re Switzerland; a Whole Account Stop Loss contract which cedes 6.75 per cent of premiums and up to 20 per cent of losses above a net loss ratio of 86 per cent from the Catlin Syndicate to Catlin Re Switzerland; and also a 75 per cent quota share contract which cedes Catlin US risk to Catlin Re Switzerland.  Further quota share contracts were in place ceding risk on 2010 and prior underwriting years to Catlin Bermuda.  The effects of each of these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the performance of each segment is assessed.

Net underwriting contribution by underwriting hub for the year ended 31 December 2011 is as follows:

US dollars in millions	London/ UK	Bermuda	US	International	Total
Gross premiums written	$2,342	$549	$852	$770	$4,513
Net premiums earned	1,891	471	636	614	3,612
Losses and loss expenses	(1,231)	(435)	(403)	(460)	(2,529)
Policy acquisition costs	(419)	(102)	(118)	(120)	(759)
Net underwriting contribution	$241	$(66)	$115	$34	$324

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

US dollars in millions	London/ UK	Bermuda	US	International	Total
Gross premiums written	$2,323	$502	$707	$537	$4,069
Net premiums earned	1,827	427	538	427	3,219
Losses and loss expenses	(1,052)	(177)	(349)	(274)	(1,852)
Policy acquisition costs	(409)	(99)	(94)	(82)	(684)
Net underwriting contribution	$366	$151	$95	$71	$683

The components of net underwriting contribution shown above are reported on the face of the Consolidated Statement of Operations.  No other items of revenue or expenses are managed on a segmental basis.

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

4   Investments

Fixed maturities

The fair values of fixed maturities at 31 December 2011 and 2010 are as follows:

	2011	2010
US dollars in millions	Fair value	Fair value
US government and agencies	$1,702	$1,071
Non-US governments	1,326	1,002
Corporate securities	1,529	1,566
Asset-backed securities	602	274
Mortgage-backed securities	860	662
Interest rate derivative contracts	8	2
Credit default derivative contracts	2	-
Total fixed maturities	$6,029	$4,577

$713 million (2010: $477 million) of the total mortgage-backed securities at 31 December 2011 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 Group has no direct exposure to government bonds issued by Portugal, Italy, Ireland, Greece and Spain.

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

		2011		2010
US dollars in millions	Fair value	%	Fair value	%
US government and agencies	$1,702	28	$1,071	23
Non-US governments	1,326	22	1,002	22
AAA	908	16	1,329	29
AA	1,465	24	550	12
A	483	8	503	11
BBB and other	135	2	120	3
Interest rate derivative contracts	8	-	2	-
Credit default derivative contracts	2	-	-	-
Total fixed maturities	$6,029	100	$4,577	100

Fixed maturities at 31 December 2011, 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.

Fair value (US dollars in millions)	2011	2010
Due in one year or less	$540	$564
Due after one through five years	3,158	2,559
Due after five years through ten years	771	438
Due after ten years	88	78
	4,557	3,639
Asset-backed securities	602	274
Mortgage-backed securities	860	662
Interest rate derivative contracts	8	2
Credit default derivative contracts	2	-
Total	$6,029	$4,577

The Group did not have an aggregate investment with a single counterparty, other than the US government, in excess of 10 per cent of total investments at 31 December 2011 and 2010.

Other invested assets

Other invested assets by category at 31 December 2011 and 2010 are as follows:

US dollars in millions	2011	2010
Hedge funds	$109	$200
Equity funds	23	-
Total investments in funds	132	200
Equity securities	38	-
Loan instruments	11	-
Total other invested assets	$181	$200

Hedge funds are a portfolio comprising ten individual hedge funds. The Group has issued redemption notices in respect of nineof the hedge funds and received the majority of the proceeds. The balance will be paid on the completion of final fund audit or the disposal of remaining investments. The redemption terms for the remaining hedge fund are three days' notice with full settlement three days' post submission of notice.

Equity funds are a portfolio comprising three individual private equity funds entered into in 2011. The equity funds have initial investment periods of up to five years.

Equity securities comprise $24 million of exchange traded funds and $14 million of private equity. Loan instruments comprise holdings in syndicated loans and other unquoted private debt.

There are unfunded commitments related to investment in funds of $58 million as at 31 December 2011 (2010: $25 million).

Net investment return

The components of net investment return for the years ended 31 December 2011 and 2010 are as follows:

US dollars in millions	2011	2010
Interest income	$156	$147
Net gains on fixed maturities and short-term investments	102	46
Net (losses)/gains on other invested assets	(2)	19
Total investment return	256	212
Investment expenses	(8)	(7)
Net investment return	$248	$205

The Group has elected to apply the fair value option to its fixed maturities and short-term investments. In 2011 net gains of $102 million (2010: $46 million) were included in the Consolidated Statements of Operations in relation to changes in the fair values of these assets.

Gains in 2011 on fixed maturities and short-term investments still held at 31 December 2011 were $38 million (2010: $33 million). Losses in 2011 on other invested assets still held at 31 December 2011 were $3 million (2010: $15 million gain).

Restricted assets

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

The total value of these restricted assets by category at 31 December 2011 and 2010 is as follows:

US dollars in millions	2011	2010
Fixed maturities	$2,957	$2,275
Short-term investments	35	503
Cash and cash equivalents	636	656
Total restricted assets	$3,628	$3,434

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 (2010: $12 million) of securities on loan at 31 December 2011.

5   Fair value measurement

The Financial Accounting Standards Board ('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 US government securities and quoted exchange traded funds.

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

Assets and liabilities utilising Level 2 inputs include: US 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 and interest rate contracts); fixed-term cash deposits classified as short-term investments; private debt with readily available prices and investments in funds with few restrictions on redemptions or new investors.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own assessment of assumptions that market participants might use.

Assets utilising Level 3 inputs include: investments in funds with significant redemption restrictions; unquoted private equity and debt not qualifying as Level 2; collateralised debt obligations ('CDO'); sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs reflect individual assumptions and judgments regarding ultimate delinquency and foreclosure rates and estimates regarding the likelihood and timing of events of defaults.

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

Assets measured at fair value on a recurring basis

The table below shows the values at 31 December 2011 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 2011	Level 1 inputs	Level 2  inputs	Level 3  inputs
Assets
US government and agencies	$1,702	$1,218	$484	$-
Non-US governments	1,326	-	1,326	-
Corporate securities	1,529	-	1,529	-
RMBS	795	-	751	44
CMBS	65	-	62	3
ABS	602	-	602	-
Interest rate derivative contracts	8	-	8	-
Credit default derivative contracts	2	-	2	-
Total fixed maturities	6,029	1,218	4,764	47
Short-term investments	115	-	115	-
Other invested assets	181	24	37	120
Total assets at fair value	$6,325	$1,242	$4,916	$167

In 2011, there were no significant transfers between Level 1 and Level 2 of the fair value hierarchy.

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

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

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

The changes in the year ended 31 December 2011 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	CMBS	Other invested assets
Balance, 1 January 2011	$168	$2	$3	$3	$-	$160
Total net gains/(losses) included in income	2	(2)	-	5	-	(1)
Acquisitions	92	47	-	-	2	43
Disposals	(105)	(11)	(3)	(8)	-	(83)
Maturities	-	-	-	-	-	-
Transfers into Level 3	9	8	-	-	1	-
Transfer out of Level 3	-	-	-	-	-	-
Foreign exchange	1	-	-	-	-	1
Balance, 31 December 2011	$167	$44	$-	$-	$3	$120
Amount of losses relating to balances still held at year end	$(2)	$(1)	$-	$-	$-	$(1)

Assets transferred into Level 3 were securities classified as sub-prime at 31 December 2011 but not at 31 December 2010.

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

US dollars in millions	Total	RMBS	ABS	CDO	Other invested assets	Catastrophe swaps
Balance, 1 January 2010	$432	$66	$4	$4	$357	$1
Total net gains/(losses) included in income	27	6	1	1	20	(1)
Net (disposals)/purchases	(290)	(70)	(2)	(2)	(216)	-
Foreign exchange	(1)	-	-	-	(1)	-
Balance, 31 December 2010	$168	$2	$3	$3	$160	$-
Amount of gains relating to balances still held at year end	$17	$2	$-	$-	$15	$-

Fair value of financial instruments

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

Fixed maturities and short-term 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.

Other invested assets:  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.  The fair values of holdings in equity and loan instruments are based on the 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 prices provided by administrators and recent transactions, if any.

Derivatives: The fair values of interest rate, foreign exchange and credit default derivative contracts are based on prices provided by independent pricing services.

Subordinated debt: Subordinated debt is carried at amortised cost. At 31 December 2011, the fair value of the subordinated debt was $58 million which compared to a carrying value of $91 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, premiums and other receivables and accounts payable approximate their carrying value due to the immediate or short term maturity of these financial instruments.

6   Reserves for losses and loss expenses

The Group establishes reserves for losses and loss expenses, which are estimates of future payments of reported and unreported losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves is complex and imprecise, requiring the use of informed estimates and judgments. The Group's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable, and would be reflected in earnings in the period in which the estimates are changed. Management believes that they have made a reasonable estimate of the level of reserves at 31 December 2011 and 2010.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2011 and 2010 is as follows:

US dollars in millions	2011	2010
Gross unpaid losses and loss expenses, beginning of year	$5,549	$5,392
Reinsurance recoverable on unpaid loss and loss expenses	(1,039)	(1,172)
Net unpaid losses and loss expenses, beginning of year	4,510	4,220
Net incurred losses and loss expenses for claims related to:
Current year	2,632	1,996
Prior years	(103)	(144)
Total net incurred losses and loss expenses	2,529	1,852
Net paid losses and loss expenses for claims related to:
Current year	(724)	(461)
Prior years	(1,000)	(1,050)
Total net paid losses and loss expenses	(1,724)	(1,511)
Foreign exchange and other	(36)	(51)
Net unpaid losses and loss expenses, end of year	5,279	4,510
Reinsurance recoverable on unpaid losses	1,188	1,039
Gross unpaid losses and loss expenses, end of year	$6,467	$5,549

As a result of the changes in estimates of insured events in prior years, the 2011 reserves for losses and loss expenses net of reinsurance recoveries decreased by $103 million (2010: $144 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.

7   Reinsurance

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

			2011			2010
US dollars in millions	Premiums written	Premiums earned	Losses incurred	Premiums written	Premiums earned	Losses incurred
Direct	$2,834	$2,747	$1,545	$2,712	$2,653	$1,538
Assumed	1,679	1,528	1,361	1,357	1,261	580
Ceded	(678)	(663)	(377)	(751)	(695)	(266)
Net premiums	$3,835	$3,612	$2,529	$3,318	$3,219	$1,852

The Group's reinsurance recoverable on unpaid losses as at 31 December 2011 and 2010 is as follows:

US dollars in millions	2011	2010
Gross reinsurance recoverable	$1,221	$1,087
Provision for uncollectible balances	(33)	(48)
Net reinsurance recoverable on unpaid losses	$1,188	$1,039

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 reduced ratings which have led to the need for the provision. At 31 December 2011 there were two reinsurers which accounted for 5 per cent or more of the total reinsurance recoverable balance.

	% of reinsurance recoverable	A.M. Best rating
Munich Re	23%	A+
Hannover Ruck-AG	7%	A

8   Derivative financial instruments

The Group is exposed to certain risks relating to its ongoing business operations. Risks managed by using derivative instruments include interest rate risk, foreign exchange risk, credit risk and equity risk.

Interest rate risk

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

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

Foreign exchange risk

During the year, the Group held various foreign currency derivatives 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. The carrying value of foreign exchange contracts at 31 December 2011 and 2010 was nil.

Credit risk

Part of the investment portfolio is invested in bonds issued by corporate issuers and so is exposed to the default risk of the underlying issuers and also to mark to market fluctuations arising from the market's evaluation of this risk.  Credit default option contracts are entered into in order to manage the credit risk associated with holding these securities.

Gains and losses on credit default options are included in net investment return together with related gains on fixed maturities in the Consolidated Statements of Operations. Credit default options' fair value is included in fixed maturities on the Consolidated Balance Sheets.

Equity risk

A portion of the investment portfolio is invested in hedge funds and funds of funds. During 2010, equity market put option contracts were held to manage the market risk associated with holding these investments in funds.

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

Gains and losses on equity market options are included in net investment return together with related gains on investments in funds in the Consolidated Statements of Operations. Equity market put option contracts' fair value is included in other invested assets on the Consolidated Balance Sheets. The Group held and closed out equity market put options in 2010, with none held at 31 December 2011 and 2010.

Catastrophe swap agreements

During 2010, Catlin Bermuda held a catastrophe swap which provided coverage in the event of one or more natural catastrophes. Catlin Bermuda's counterparty in the catastrophe swap was a special purpose vehicle, Newton Re. The catastrophe swap expired in 2010 without being triggered. No catastrophe swaps were held at 31 December 2011 and 2010.

Impact of derivatives

The fair values of derivatives at 31 December 2011 and 2010 are as follows:

		2011		2010
US dollars in millions	Assets	Liabilities	Assets	Liabilities
Interest rate derivative contracts	$18	$10	$2	$-
Credit default option contracts	2	-	-	-
Total derivatives	$20	$10	$2	$-

The notional values of exchange traded and OTC open derivatives at 31 December 2011 and 2010 are as follows:

	Notional value
US dollars in millions	2011	2010
Interest rate options	$3,600	$850
Other interest rate derivative contracts	$500	$-
Foreign exchange contracts	$14	$-
Credit default option contracts	$650	$-

The net gains/(losses) on derivatives at 31 December 2011 and 2010 are as follows:

US dollars in millions	2011	2010
Equity market options contracts	$-	$(4)
Interest rate derivative contracts	2	(6)
Foreign exchange contracts	1	(8)
Credit default option contracts	(1)	-
Catastrophe swaps	-	(15)
Net gains/(losses) on derivatives	$2	$(33)

The derivatives contracts held by the Group at 31 December 2011 contain no credit risk-related contingent features.

9   Subordinated debt

The Group's outstanding subordinated debt as at 31 December 2011 and 2010 consisted of the following:

US dollars in millions	2011	2010
Variable rate, face amount €7, due 15 March 2035	$9	$9
Variable rate, face amount $27, due 15 March 2036	27	27
Variable rate, face amount $31, due 15 September 2036	31	32
Variable rate, face amount $10, due 15 September 2036	10	10
Variable rate, face amount €11, due 15 September 2036	14	15
Total subordinated debt	$91	$93

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 were 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 were each redeemable at the discretion of the issuer on 15 September 2011.

10 Intangible assets and goodwill

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

Net intangible assets and goodwill as at 31 December 2011 and 2010 consist of the following:

US dollars in millions	Goodwill	Indefinite life intangibles	Finite life intangibles	Total
Net value at 1 January 2010	$77	$637	$4	$718
Movements during 2010:
Foreign exchange revaluation	(3)	-	-	(3)
Acquisitions	3	-	-	3
Amortisation charge	-	-	(2)	(2)
Total movements during 2010	-	-	(2)	(2)
Net value at 31 December 2010	77	637	2	716
Movements during 2011:
Foreign exchange revaluation	-	-	-	-
Acquisitions	-	3	-	3
Amortisation charge	-	-	(2)	(2)
Total movements during 2011	-	3	(2)	1
Net value at 31 December 2011	$77	$640	$-	$717

Goodwill, syndicate capacity and admitted licenses are considered to have an indefinite life and as such are tested annually for impairment as at 30 September. Neither goodwill nor intangibles were considered impaired in 2011 or 2010.

The acquisition of indefinite life intangibles in 2011 relates to the purchase of admitted licenses in the United States.

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 Sheets. 

The fair value of the Group's syndicate capacity is assessed by reference to market activity where relevant and internally developed cash flow models. In 2011 and 2010, 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 2011 the gross carrying amount of finite life intangibles was $10 million (2010: $10 million) and accumulated amortisation was $10 million (2010: $8 million). Amortisation of intangible assets in future years will be $nil million.

11 Taxation

Bermuda

Under current Bermuda law neither the Company nor its Bermuda subsidiaries are required to pay any taxes in Bermuda on their income or capital gains. Both the Company and its Bermuda subsidiaries have received undertakings from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, they will be exempt from taxation in Bermuda until March 2035.

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.

Legislation was introduced in Finance Act 2011 to reduce the main rate of corporation tax in the UK from 28 per cent to 26 per cent with effect from 1 April 2011, and by a further 1 per cent reduction to 25 per cent with effect from 1 April 2012.  The effect of this enacted reduction is reflected in the deferred tax liability recorded on the Balance Sheet as at 31 December 2011.

The UK government has also announced its intent to reduce the rate by a further 1 per cent per annum, falling to 23 per cent with effect from 1 April 2014.

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.

Switzerland

The Group expanded its underwriting operations in Switzerland during 2011 and the income of these subsidiaries is subject to Swiss federal and cantonal taxes.

Other international income taxes

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

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

The income tax expense for the years ended 31 December 2011 and 2010 is as follows:

US dollars in millions	2011	2010
Current tax expense	$6	$12
Deferred tax expense	2	19
	8	31
Rate change on deferred tax	(19)	(6)
(Benefit)/expense for income taxes	$(11)	$25

The effective tax rate for the Group is negative 15.6 per cent (2010: 6.3 per cent). The rate change benefit of $19 million is a result of a reduction in the UK corporation tax rate from 27 per cent to 25 per cent on the net deferred tax liability. A reconciliation of the difference between the expense for income taxes and the expected tax expense at the weighted average tax rate for the years ended 31 December 2011 and 2010 is provided below. The weighted average expected tax expense has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

US dollars in millions	2011	2010
Expected tax expense at weighted average rate	$10	$15
Permanent differences:
Disallowed expenses and losses not recognised	10	11
Prior year adjustments including changes in uncertain tax positions	(12)	5
Rate change	(19)	(6)
(Benefit)/expense for income taxes	$(11)	$25

The components of the Group's net deferred tax liability as at 31 December 2011 and 2010 are as follows:

US dollars in millions	2011	2010
Deferred tax assets:
Net operating loss carry forwards	$267	$303
Foreign tax credits	42	43
Capital allowances	13	10
Other timing differences	25	5
Valuation allowance	(25)	(30)
Total deferred tax assets	$322	$331
Deferred tax liabilities:
Untaxed profits	(416)	(459)
Intangible assets arising on business combination	(92)	(94)
Syndicate capacity	(16)	(15)
Total deferred tax liabilities	$(524)	$(568)
Net deferred tax liability	$(202)	$(237)

As at 31 December 2011 the Group has operating tax losses carried forward of $1,069 million (2010: $1,152 million) which are available to offset future taxable income. The tax losses primarily arise in UK subsidiaries and relate to accelerated tax deductions for member-level reinsurance premiums. These are taxed on a declarations basis and are therefore only timing items. There are no time restrictions on the use of these losses and they are expected to be fully utilised.

As at 31 December 2011 there are potential deferred tax assets of $25 million (2010: $30 million) in the US companies relating to future tax deductions, but a 100 per cent valuation allowance has been recognised in respect of these.

Uncertain tax positions

As at 31 December 2011 the liability amount of uncertain tax benefits was $13 million (2010: $13 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	2011	2010
Unrecognised tax benefits balance at 1 January	$13	$4
Gross decreases for tax positions of prior years	-	9
Unrecognised tax benefits balance at 31 December	$13	$13

The Group does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts. The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements. The Group did not pay or accrue any interest or penalties in 2011 or 2010 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	2008-2011
United States	2008-2011

12 Stockholders' equity

The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2011 and 2010:

	2011	2010
Common stock, par value $0.01
Authorised	500,000,000	500,000,000
Issued	360,990,321	359,118,666
Stock held by Employee Benefit Trust	(16,031,213)	(16,467,609)
Outstanding	344,959,108	342,651,057
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 2011 and 2010:

	2011	2010
Balance, 1 January	359,118,666	358,895,225
Exercise of stock options and warrants	1,871,655	223,441
Balance, 31 December	360,990,321	359,118,666

Preferred stock

On 18 January 2007 Catlin Bermuda issued 600,000 non-cumulative perpetual preferred shares, par value of $0.01 per unit, with liquidation preference of $1,000 per unit, plus declared and unpaid dividends. Dividends at a rate of 7.249 per cent on the liquidation preference are payable semi-annually on 19 January and 19 July in arrears as and when declared by the Board of Directors, commencing on 19 July 2007 up to but not including 19 January 2017. Thereafter, if the stock has not yet been redeemed, dividends will be payable quarterly at a rate equal to 2.975 per cent plus the three-month LIBOR rate of the liquidation preference. Catlin Bermuda received proceeds of approximately $590 million net of issuance costs. The preferred shares do not have a maturity date and are not convertible into or exchangeable into any of Catlin Bermuda's or the Group's other securities.

Treasury stock

In connection with the Performance Share Plan ('PSP'), at each dividend date an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting) is paid into an Employee Benefit Trust ('EBT'). The EBT uses these funds to purchase Group common stock in the open market. This stock will ultimately be distributed to PSP holders to the extent that the PSP awards vest. The Group has also purchased shares that will be used to satisfy PSP and/or other employee share plan awards if and when they vest and become exercisable. During 2011, the Group, through the EBT, purchased 1,144,471 of the Group's stock at an average of $6.31 (£3.83) per unit. The total amount paid for treasury stock of $7 million was deducted from stockholders' equity. The cost of shares held by the EBT of $105 million is shown as a deduction to the stockholders' equity.

Warrants

In 2002 the Company issued 20,064,516 warrants to purchase common stock. Warrants may be exercised in whole or in part, at any time, until 4 July 2012 and are exercised at a price of $4.37. During 2009 warrants increased by 874,829 in relation to the Rights Issue pursuant to anti-dilution provisions. During 2011, 5,491,730 warrants to purchase common stock were exercised and settled net for 1,476,574 shares of common stock, leaving 1,420,985 warrants outstanding at 31 December 2011.

Dividends

Dividends on common stock

On 18 March 2011 the Group paid a final dividend on the common stock relating to 2010 financial year of 17.9 pence per share (28.8 cents per share) to stockholders of record at the close of business on 18 February 2011. The total dividend paid for the 2010 financial year was 26.5 pence per share (42.5 cents per share).

On 23 September 2011, the Group paid an interim dividend relating to the 2011 financial year of 9.0 pence per share (14.7 cents per share) to stockholders of record on 26 August 2011.

Dividends on preferred stock

On both 19 January and 19 July 2011, Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

13 Employee stock compensation schemes

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

The total amount expensed to income in respect of all plans in the year ended 31 December 2011 was $10 million (2010: $23 million), included in administrative and other expenses. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions. 

Performance Share Plan

In February 2011 a total of 7,225,549 options with $nil exercise price and 2,677,820 non-vested shares (total of 9,903,369 securities) were awarded to Group employees under the PSP. In August 2011, a further 101,183 options with $nil exercise price and 275,244 non-vested shares (total of 376,427 securities) were awarded, resulting in a total of 10,279,796 securities granted to Group employees under the PSP in 2011. Up to half of the securities will vest in 2014 and up to half will vest in 2015, 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 2 per cent for grants made in 2011, 3 per cent for grants made in 2010, 5 per cent for grants made in 2009 and 5 per cent for grants made in 2008. 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 Consolidated Statement of Operations, with a corresponding adjustment to equity. The total number of shares in respect of which PSP securities were outstanding at 31 December 2011 was 27,776,130 (2010: 22,393,627), and the total amount of expense relating to PSP for the year ended 31 December 2011 was $10 million (2010: $23 million). 

The table below shows the PSP securities as at 31 December 2011:

	Outstanding	Non-vested	Vested	Weighted average fair value
Beginning of year	22,393,627	22,079,927	313,700	$5.70
Granted during year	10,279,796	10,279,796	-	$5.99
Vested during year	(2,985,199)	(4,032,630)	1,047,431	$6.06
Forfeited during year	(918,544)	(918,544)	-	$6.17
Exercised during year	(993,550)	-	(993,550)	$6.16
End of year	27,776,130	27,408,549	367,581	$6.18
Exercisable, end of year	367,581	-	367,581	$6.18

The total fair value of shares vested during the year was $6 million (2010: $11 million).

The weighted average remaining contractual life of the options is eight years. The maximum contractual term of the equity share options outstanding is nine years.

The total compensation to be expensed in future periods relating to unvested awards outstanding at the year end is $11 million. The weighted average period of recognition of these shares is 1.5 years.

In addition, at each dividend payment date up to 2011 an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting), was paid into the EBT. This amount, totalling $nil million in 2011 (2010: $8 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 2011 and 2010. All options will expire by 4 July 2012. As at 31 December 2011 there were 4,031,382 (2010: 4,568,169) options outstanding with an exercise price of $4.37 and 74,607 (2010: 78,097) options outstanding with an exercise price of £3.06.

14 Earnings per share

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

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

(i)         PSP;

(ii)         LTIP;

(iii)        Warrants; and

(iv)        Employee Share Plans.

Income to common stockholders is arrived at after deducting preferred share dividends of $44 million (2010: $44 million).

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

	2011	2010
Weighted average number of shares	344,295,329	344,634,882
Dilution effect of warrants	1,912,689	1,353,902
Dilution effect of stock options and non-vested shares	11,547,550	16,856,689
Weighted average number of shares on a diluted basis	357,755,568	362,845,473
Earnings per common share
Basic	$0.11	$0.98
Diluted	$0.11	$0.93

In 2011 and 2010 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 2011 and 2010.

15 Other comprehensive income/(loss)

The following table details the individual components of other comprehensive income/(loss) for 2011 and 2010:

2011 US dollars in millions	Amount before tax	Tax benefit/ (expense)	Amount after tax
Cumulative translation adjustments	$(46)	$4	$(42)
Defined benefit pension plan	-	-	-
Other comprehensive loss	$(46)	$4	$(42)

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

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

US dollars in millions	2011	2010
Cumulative translation adjustments	$(227)	$(185)
Funded status of defined benefit pension plan adjustment	1	1
Accumulated other comprehensive loss	$(226)	$(184)

16 Pension commitments

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

In the UK the Group operates defined contribution schemes for certain directors and employees, which are administered by third-party insurance companies. The pension cost for the UK scheme was $11 million for the year ended 31 December 2011 (2010: $8 million).

In Bermuda the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2011 (2010: $1 million).

In the US the Group has adopted a 401(k) Profit Sharing Plan qualified under the Internal Revenue Code and a Non-Qualified Deferred Compensation Plan under which the Group contributes a specified percentage of each employee's earnings. The pension cost for the US scheme was $5 million for the year ended 31 December 2011 (2010: $8 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 2011 were $26 million (2010: $25 million) and fair value of plan assets was $28 million (2010: $27 million). Plan assets are substantially all invested in corporate bonds, valued using Level 2 inputs in the fair value hierarchy described in Note 5. The pension costs for the defined benefit scheme were insignificant for the years ended 31 December 2011 and 2010.

Pension costs for pension schemes in other countries of operation are considered individually insignificant but in aggregate amount to $4 million (2010: $3 million).

17 Statutory financial data

The statutory capital and surplus of each of the Group's principal operating subsidiaries is in excess of regulatory requirements of $987 million (2010: $1,081 million).  The Group also has sufficient capital available to meet Funds at Lloyd's requirements of $1,340 million (2010: $1,331 million).

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

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

18 Commitments and contingencies

Legal proceedings

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

Concentrations of credit risk

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

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

Letters of credit

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

As at 31 December 2011, the Group has access to the following letter of credit facilities:

·      A three-year $650 million unsecured multi-bank facility available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2011 $225 million of letters of credit were issued under this facility. The facility has an expiry date of 31 December 2013.

·      A bilateral facility available for utilisation by Catlin Bermuda, collateralised by pledged financial assets. As at 31 December 2011 $144 million of letters of credit were issued under this facility.

·      A bilateral facility available for utilisation by Catlin Re Switzerland, collateralised by pledged financial assets. As at 31 December 2011 $9 million of letters of credit were issued under this facility.

·      Two facilities available for utilisation by Catlin Bermuda for Funds at Lloyd's purposes. As at 31 December 2011 $200 million of letters of credit were issued under these facilities. The facilities have an expiry date of 31 December 2015 and 31 December 2016 respectively.

·      A facility managed by Lloyd's, acting for the Syndicates. As at 31 December 2011 $7 million of letters of credit were issued under this facility.

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

Future lease commitments

The Group leases office space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2011 are as follows:

US dollars in millions
2012	$16
2013	21
2014	22
2015	19
2016 and thereafter	98
Total	$176

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $15 million (2010: $9 million).

19 Related parties

The Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2011 and 2010 was insignificant to the Group Financial Statements.

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

20 Subsequent events

Proposed dividend

On 8 February 2012 the Board approved a proposed final dividend of 19.0 pence per share (30.2 cents per share), payable on 16 March 2012 to stockholders of record at the close of business on 17 February 2012. The final dividend is payable in sterling.

Preferred share dividend

The Board of Catlin Bermuda approved a dividend of $22 million to the shareholders of the non-cumulative perpetual preference shares. This dividend was paid on 19 January 2012.

Management has evaluated subsequent events until 8 February 2012, the date of issuance of the financial statements.

 

END

 

 

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