Interim Results
Catlin Group Limited
06 September 2007
FOR IMMEDIATE RELEASE
6 September 2007 Release 2007-16
CATLIN GROUP ANNOUNCES INTERIM RESULTS
FOR PERIOD ENDED 30 JUNE 2007
HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), the
international property and casualty insurer and reinsurer, announces its
financial results for the six months ended 30 June 2007.
Highlights:
• Income before tax of US$190 million after acquisition effects; net
income of US$162 million
• Accelerating financial benefits from acquisition in second half of 2007
• Group on track to meet 2007 financial expectations
• Gross premium written of US$2.0 billion; 29 per cent increase on H1 2006
(combined Catlin 'as reported' and Wellington on US GAAP basis)
• 41 per cent increase in unearned premiums during first half to US$1.8
billion
• 34 per cent increase in stockholders' equity during first half to US$2.7
billion
• Integration of Wellington operations completed with virtually no
business loss as result of acquisition
• Operating and tax synergies resulting from acquisition greater than
expected, post-tax synergy expectation for 2008 increased to at least
US$100 million
• Interim dividend of 8.1 pence (16.4 US cents) per share (30 June 2006:
6.0 pence or 11.3 US cents)
• Further embedded growth benefits will be seen in 2008
Commenting on the Group's interim results, Chief Executive Stephen Catlin said:
'I am very pleased with the Catlin Group's performance during the first half of
2007. Our retention of business following the Wellington acquisition has been
excellent, and we have continued to build our business for the future through
the recruitment of new underwriting teams and the continued development of
Catlin US and our international offices.
'First-half profits were reduced by residual interests of Wellington's former
third-party capital providers and by integration costs. These effects will
decline in future periods and the financial benefits of the transaction will
grow. Catlin is on track to meet its financial targets for 2007. In 2008, we
will benefit from further embedded growth arising from the acquisition as well
as at least US$100 million in synergy savings.'
US$000 30 June 2007 30 June 2006 30 June 2006
combined(1) Catlin as reported
Gross premiums written 1,997,507 1,552,904 903,145
Net premiums written 1,445,671 1,235,915 765,993
Net premiums earned 1,192,212 1,050,152 642,483
Income before income tax expense 190,249 228,035 167,399
Net income 161,720 186,918 147,310
Loss ratio 54.7% 52.8% 49.3%
Expense ratio 37.5% 35.9% 35.4%
Combined ratio 92.2% 88.7% 84.7%
Annualised investment return 4.3% 2.5% 1.7%
Effective tax rate 15.0% 18.0% 12.0%
Annualised return on average equity (2) 15.7% 22.0% 29.1%
Earnings per share (US dollars) 0.65 - 0.92
Interim dividend per share (pence) 8.1 - 6.0
Interim dividend per share (US cents) 16.4 - 11.3
30 June 2007 31 December 2006 30 June 2006
Catlin as reported
Total assets 9,730,027 8,806,318 4,403,357
Investments and cash 5,354,159 5,013,709 2,498,911
Stockholders' equity 2,702,581 2,018,280 1,091,214
Unearned premiums 1,819,727 1,290,379 872,898
Book value per share (sterling) £4.16 £4.12 £3.60
Book value per share (US dollar) $8.35 $8.07 $6.67
(1) Represents the aggregation of Catlin 'as reported' and Wellington on a
US GAAP basis
(2) Excludes preferred shares
See also table on Page 3 of Interim Results Statement for an analysis of
acquisition effects.
For more information contact:
Media Relations:
James Burcke, Tel: +44 (0)20 7458 5710
Head of Communications, London Mobile: +44 (0)7958 767 738
E-mail: james.burcke@catlin.com
Liz Morley, Maitland Tel: +44 (0)20 7379 5151
E-mail: emorley@maitland.co.uk
Investor Relations:
William Spurgin, Tel: +44 (0)20 7458 5726
Head of Investor Relations, London Mobile: +44 (0)7710 314 365
E-mail: william.spurgin@catlin.com
Notes to editors:
1. Catlin Group Limited, headquartered in Bermuda, is an international
specialist property/casualty insurer and reinsurer writing more than 30
classes of business worldwide through four underwriting platforms and an
international network of offices. 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 four underwriting platforms are:
• The Catlin Syndicate at Lloyd's of London (Syndicate 2003), which is a
recognised leader of numerous classes of specialty insurance and
reinsurance. The Catlin Syndicate is the largest at Lloyd's in 2007 based
on premium capacity of £1.25 billion.
• Catlin Bermuda (Catlin Insurance Company Ltd.), which is a leading
participant in the Bermuda market, underwriting a diversified portfolio of
property treaty, casualty treaty, political risk and terrorism, and
structured risk coverages.
• Catlin UK (Catlin Insurance Company (UK) Ltd.), which specialises in
underwriting commercial non-life insurance for UK clients through a network
of regional offices. It also writes other classes of business written by
the Catlin Syndicate.
• Catlin US, which encompasses Catlin's operations based in the United
States. Catlin US underwrites a wide variety of specialty property/casualty
insurance and reinsurance products from a network of offices throughout the
U.S. Catlin US includes Catlin Insurance Company Inc. and Catlin Specialty
Insurance Company Inc.
3. Catlin's international network of offices allows the Group to
diversify further its risk portfolio and to work more closely with local
policyholders and brokers. Besides its offices in the UK, US and Bermuda,
Catlin operates offices in Canada, Australia, Singapore, Malaysia, Hong Kong,
China, Guernsey, Germany, Belgium, France, Spain, Switzerland and Austria.
4. Catlin's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America ('US
GAAP'). The Group reports its results in US dollars.
5. Rates of exchange at 30 June 2007 -- balance sheet: £1=US$2.01 (30
June 2006: US$1.85); income statement: £1=US$1.98 (30 June 2006: US$1.79).
6. Detailed information regarding Catlin's financial results for the
six months ended 30 June 2007, including unaudited consolidated financial
statements, is attached.
7. Statements that the Wellington acquisition is expected to be
earnings accretive do not constitute a profit forecast and should not be
interpreted to mean that the earnings per share in 2007, or in any subsequent
period, would necessarily match or be greater than those for the relevant
preceding financial year.
Catlin Group Limited
Interim Results Statement for the Six Months Ended 30 June 2007
I am pleased to report the excellent progress made by the Catlin Group during
the six months ended 30 June 2007 following the acquisition of Wellington
Underwriting plc in December 2006. During the first half Wellington's operations
have been integrated with Catlin's. Virtually no business was lost as a result
of the acquisition, whilst at the same time we have attracted new underwriting
teams to the Group and strengthened our staff overall. Broker and client support
for the acquisition has been very favourable.
The Group performed well financially during the first half. Gross written
premium volume grew during the period as the Group took advantage of new
business opportunities, including business written by Catlin US and our enlarged
network of international offices. Losses were relatively benign. First-half
profits were reduced, however, by the residual interests of Wellington's former
third-party capital providers and by integration costs. These will decline in
future periods and the financial benefits of the transaction (including embedded
growth and synergy benefits) will grow.
The acquisition is expected to be accretive to earnings per share for 2007 and
for subsequent years. Operating cost and tax synergies are already being
realised, and we now anticipate that total synergies will be at least US$100
million after tax in 2008.
The rating environment remained strong across the more than 30 classes of
business that Catlin underwrites, although average rates decreased for both
catastrophe and non-catastrophe classes during the first half. Absent an extreme
event, we expect that rates overall will continue to decrease during the
remainder of the year and into 2008. However, overall market conditions should
remain favourable, and Catlin's strategy of disciplined underwriting combined
with controlled expansion in carefully selected areas will serve the Group well.
The investment in Catlin US and the international offices, along with the new
underwriting teams, will create new growth opportunities for Catlin in 2008 and
beyond. We look towards the future with optimism.
Financial Results
The attached financial statements compare the Group's performance in the period
ended 30 June 2007 with Catlin's results for the comparable period of 2006. The
financial statements do not include Wellington's operations in the first half of
2006 as the acquisition date for accounting purposes was 31 December 2006.
However, the Group believes that it is useful to compare the Group's first-half
2007 results with a pro forma combination of Catlin and Wellington's operations
during the first six months of 2006. The table below shows the Group's financial
results for the period ended 30 June 2007, compared with both the pro forma
combination of Catlin and Wellington operations for the comparable period of
2006 ('combined') and Catlin's stand-alone operations for the same period ('as
reported'):
US$000 30 June 2007 30 June 2006 30 June 2006
combined(1) Catlin
as reported
Gross premiums written $1,997,507 1,552,904 $903,145
Net premiums earned 1,192,212 1,050,152 642,483
Investment and other income 133,032 116,339 72,775
Total revenues 1,325,244 1,166,491 715,258
Losses and operating expenses 1,134,995 938,456 547,859
Income before minority interest and income tax
expense 190,249 228,035 167,399
Minority interest and income tax expense (28,529) (41,117) (20,089)
Net income $161,720 186,918 $147,310
Loss ratio 54.7% 52.8% 49.3%
Expense ratio 37.5% 35.9% 35.4%
Combined ratio 92.2% 88.7% 84.7%
Effective tax rate 15.0% 18.0% 12.0%
Annualised return on average equity (2) 15.7% 22.0% 29.1%
(1) Represents the aggregation of Catlin 'as reported' and Wellington on a
US GAAP basis
(2) Excludes preferred shares
Gross premiums written during the first six months of 2007 amounted to US$2.0
billion, a 29 per cent increase from the US$1.6 billion in gross premiums
underwritten by Wellington and Catlin combined in the first six months of 2006
and a 121 per cent increase from the US$903 million underwritten by Catlin
alone. If Wellington had owned 100% of its syndicate capacity during 2006, the
US$2.0 billion in gross premium written by the Catlin Group during the first
half of 2007 would represent a 7 per cent increase.
Net premiums earned amounted to US$1.2 billion or approximately 60 per cent of
gross premiums written, a considerably lower ratio than normal. This earnings
lag is due primarily to two factors: firstly, most premiums earned were written
during previous periods, during which time approximately one-third of the
premiums written by the Wellington Syndicate were for the benefit of third-party
capital providers. Secondly, the Group's reinsurance costs were more
concentrated in the early part of the year than usual. The earnings lag also
adversely affected loss, expense and combined ratios.
Net income of US$162 million represented a 10 per cent increase on an as
reported basis (30 June 2006: US$147 million), but represented a 13 per cent
decrease on a combined basis (30 June 2006: US$187 million).
Embedded Growth and Acquisition Accounting Effects
The Group's financial results are influenced by a number of factors related to
the acquisition of Wellington:
•100% ownership of Wellington Syndicate 2020. Up to the end of 2006 when
it was acquired by Catlin, approximately one-third of Wellington Syndicate
2020's capacity was attributable to third-party capital providers. The vast
bulk of Syndicate 2020's contribution to profits during the first half
arises from business written during 2006 and prior. As a result,
approximately a third of premiums and associated profits earned by Syndicate
2020 during the first half are for the benefit of that third-party capital;
this amounted to profits before tax of US$65 million in the first half of
2007.
The Group's share of earned premiums and related profits will increase over
time as premiums written in 2007 fully earn. At 30 June, unearned premiums
reached US$1.8 billion, a 41 per cent increase compared with US$1.3 billion
at 31 December 2007. These will be earned by the Group beginning in the
second half of the year.
Catlin experienced a similar effect in 2003 following the purchase in late
2002 of the capacity supplied by Lloyd's Names to Catlin-managed syndicates.
Because of the lag in earned premium growth, profitability was greater in
the second half of 2003 as compared with the first half.
•Names' Quota-Share reinsurance. As part of Catlin's acquisition of 100
per cent of the capacity of the Wellington Syndicate, some of the
third-party capital providers previously supporting the Wellington Syndicate
are participating on a 12.5 per cent quota share ('QS') reinsurance of the
Catlin Syndicate for 2007 and 2008. There will be an uplift in retained
earned premium upon expiry of the QS at the end of 2008. During the first
half of 2007, the QS has an impact on both reinsurance ceded and net earned
premiums, although it had a minimal effect on profitability as the 2007
underwriting year is not yet contributing significant earned profits. The
impact of the QS on the Group's financial performance in future reporting
periods will depend on future profitability.
The foregoing factors mean that the Wellington acquisition will provide
Catlin with a source of embedded growth over the next several years.
•Integration costs and acquisition accounting effects. The Group recorded
US$23 million of integration costs during the first half of 2007, which are
included in administrative expenses. In addition, policy acquisition costs
include the amortisation of the value of the in-force asset ('VIF') that the
Group was required to establish under US Generally Accepted Accounting
Principles ('US GAAP'). This asset reflects a valuation of the profit
embedded in Wellington's unearned premiums at the time of the acquisition
and is larger than the deferred acquisition costs that were written off at
the time of the acquisition.
During the first half of 2007, the amount of VIF amortisation was US$10
million greater than the corresponding deferred acquisition cost
amortisation would have been. The VIF will be almost totally amortised by
31 December 2007.
Part of the consideration paid for the Wellington Syndicate capacity owned
by third-party capital providers related to the value of the QS reinsurance
for 2007 and 2008 referred to above. As this was a non-cash transaction, an
offsetting reinsurance creditor liability was created and is being amortised
to income during 2007 and 2008. This amortisation increased income before
tax by approximately US$7 million in the first half of 2007.
The impact of these issues on the Group's income statement during the period
ended 30 June 2007 is shown in the table below. Overall, these transaction
effects reduced the Group's pre-tax and net income by nearly one-third:
30 June 2007 Names' share Names' QQS of Integration 30 June 2007
as reported of Syndicate Syndicate costs and after
2020 for 2003 for 2007 acquisition acquisition
US$m 2005-2006 accounting adjustments
effects
Gross premiums written 1,998 48 - - 2,046
Net premiums earned 1,192 183 22 - 1,397
Investment and other
income 133 27 - - 160
Total revenues 1,325 210 22 - 1,557
Loss and operating
expenses (1,135) (145) (22) 26 (1,276)
Income before tax 190 65 - 26 281
Income tax expense (28) (20) - (5) (53)
Net income 162 45 (0) 21 228
The Group achieved a 16 per cent annualised return on average equity during the
first half of 2007; annualised return on average equity on an adjusted basis
would have been 22% (30 June 2006: 22% combined).
Losses and Expenses
The Group's loss ratio during the first six months of 2007 was 54.7 per cent,
(30 June 2006: 52.8 per cent combined, 49.3 per cent as reported ). The increase
in the loss ratio reflects the weakening rating environment during the period
more than an increased level of losses.
Incurred losses of approximately US$30 million net of reinsurance in the first
half resulted from the UK floods in June 2007, divided almost evenly between the
Catlin Syndicate and Catlin Bermuda. The Group expects that the UK floods in
July will result in approximately US$10 million in additional losses, which will
be reflected in the Group's second-half 2007 results. The losses from both the
June and July floods are within the Group's attritional loss expectations.
The Group released US$15 million from prior year reserves during the first half
of 2007 (30 June 2006: US$4 million as reported). The Group continues to
maintain reserves that are conservative relative to internal and external
actuaries' best estimates. During the first half, the Catlin reserving approach
was applied to the entire portfolio, including legacy Wellington operations.
The expense ratio in the first half was 37.5 per cent (30 June 2006: 35.9 per
cent combined basis, 35.4 per cent stand-alone basis). The increased expense
ratio reflects the lag in earned premium growth, the Group's substantial
investment in the development of Catlin US and the international office network,
and the acquisition accounting effects noted earlier. The expense ratio should
decrease in the second half as earned premium volume increases.
The Group calculates the expense ratio based on net premiums earned; the
following table shows first-half expenses expressed as a percentage of net
premiums earned and written:
H1 2007 H1 2006
combined
Expenses as a percentage of:
Net premiums earned 37.5% 35.9%
Net premiums written 30.9% 30.5%
Not included in the first-half 2007 expense ratio are US$23 million in
integration costs related to the Wellington acquisition.
The Group's reported combined ratio in the first half of 2007 was 92.2 per cent
(30 June 2006: 88.7 per cent combined basis, 84.7 per cent as reported).
Investments
Net investment income in the first half of 2007 amounted to US$131 million (30
June 2006: US$86.6 million combined, US$52 million as reported). The Group
incurred realised and unrealised investment losses of US$33 million due to
rising interest rates during the period. The total annualised return on
investment during the period was 4.3 per cent (30 June 2006: 2.5 per cent
combined, 1.7 per cent as reported). The first-half 2007 total return on
investment excludes premiums and expenses related to the Group's catastrophe
swap and a capital loss on the exercise of share options in Aspen Insurance
Holdings Limited that were acquired with Wellington.
The Group's balance sheet was strong as at 30 June 2007. Investments and cash
increased by 7 per cent during the first half to US$5.4 billion (31 December
2006: US$5.0 billion). The vast majority of the Group investments during the
period were invested in fixed maturities and cash and equivalents. Included in
the portfolio at 30 June 2007 were asset-backed securities with a book value of
approximately US$105 million which have exposure to the sub-prime mortgage
market. Of these securities, more than 95 per cent are rated 'AAA' with the
balance rated 'AA'. The exposure to the sub-prime market is considered to be
insignificant compared with the size of the overall balance sheet.
The US$2.6 billion in fixed maturities held by the Group at 30 June 2007 are
divided as follows:
Government AAA AA A BBB Other Total
& agency
Government & agency 34% - - - - - 34%
Agency mortgage-backed securities - 8% - - - - 8%
Corporate - 1% 6% 10% 1% - 18%
Asset-backed securities - 17% - 1% - - 18%
Mortgage-backed securities - 21% 1% - - - 22%
Total 34% 47% 7% 11% 1% - 100%
A review of the Group's long-term investment strategy was completed during the
first half of 2007. As a result of this strategy, the Group will continue to
invest at least 80 per cent of the portfolio in cash and fixed-income
securities, and the review concluded that diversification of up to 20 per cent
of assets is appropriate to provide an attractive risk-adjusted return. The
implementation of this strategy will begin in the fourth quarter of 2007 and is
expected to result in an improvement of 50 basis points in the annual investment
return beginning in 2008.
Integration
The integration of Wellington's operations was largely complete by 30 June 2007.
During the first half, all of the remaining members of Wellington's London staff
relocated to Catlin's offices, joining the London underwriting team which
relocated shortly after the acquisition was finalised in December 2006. In
addition, the underwriting staff and all operational departments within the
Group have been fully integrated. The only major integration milestone that
remains is the full migration of Wellington's historical data to Catlin's
systems, which will be competed in 2008.
Integration costs incurred in the first half amounted to US$23 million,
primarily related to personnel, facilities, systems integration and professional
fees. A further US$12 million in integration costs, primarily attributable to
data migration and other IT expenses, is expected to be incurred in the second
half of 2007.
In January 2007 the Group refinanced the US$500 million bridge financing
facility arranged prior to the Wellington acquisition through the issue by
Catlin Bermuda of US$600 million in non-cumulative perpetual preferred shares.
As well as refinancing the bridge financing facility at a favourable cost, the
preferred shares qualify as capital for regulatory purposes in Bermuda and, in
large part, for rating agencies. Dividends are paid twice annually at a rate of
7.249 per cent. The first dividend was declared in July 2007 and will be
reflected in the full-year financial statements.
The acquisition will result in synergies relating to operating costs, tax,
reinsurance and investments.
•The operating cost synergies are projected to be US$22 million on a
pre-tax basis in 2007, ahead of the original target of US$14 million made
when the transaction was announced in October 2006. Operating cost synergies
in 2008 and subsequent years are forecast at US$33 million annualised before
tax, an increase from the original projection of US$21 million.
•The tax synergies result from the maintenance of capital in Bermuda. The
Group's effective tax rate for the first half of 2007 was 15 per cent,
within Catlin's medium-term expectations and a reduction from the 18 per
cent combined tax rate in the first half of 2006. A reorganisation of the
Group's structure was completed in June 2007 that will maximise capital and
income flows throughout the Group to Catlin Bermuda. As a result of this
reorganisation, the Group expects the effective tax rate to decrease as
increased amounts of income emerge from Catlin Bermuda.
•The reinsurance and investment synergies are expected to be delivered in
2008.
We now expect total annualised after-tax synergies of at least US$100 million in
2008, a US$30 million increase compared with the estimate made when the
transaction was announced.
The Group expected that some employees would leave the Group following the
Wellington acquisition. During the period from 18 December 2006, the date that
the acquisition was declared unconditional, through 30 June 2007, 162 employees
left Catlin, including 62 agreed departures and 100 resignations. During the
same period, the Group added 157 employees, including 57 new underwriting staff.
This new staff represents a significant increase in the resources of the Group.
Catlin is now in a growth mode, and additional staff - including new
underwriting teams - have committed to join Catlin during the second half of
2007. The Group's total headcount - including contractors - was 1,110 at 30 June
2007.
Overview of Operations
Catlin's experience in the first half of 2007 demonstrated the benefits of the
Wellington acquisition. Virtually no business has been lost as a result of the
acquisition, and it has increased the scale of all four Catlin underwriting
platforms whilst reinforcing the Group's leadership position in many of the
markets in which it operates.
Gross premiums written increased 7 per cent during the period when measured on
the basis that assumes that Catlin owned 100 per cent of the Wellington
Syndicate at 30 June 2006. This growth was produced by several sources,
including business written by Catlin US and the Group's international offices.
The increase in gross premiums written was achieved at attractive pricing
levels, although weighted premium rates across the Group's risk portfolio
decreased by 4 per cent during the period. Average weighted premium rates for
catastrophe-exposed business decreased by 3 per cent, while rates for
non-catastrophe business decreased by 5 per cent.
Catlin underwriters continue to refuse to underwrite business that does not
offer adequate profitability potential in line with Catlin's strategy of
focusing on bottom-line profit rather than top-line growth. As rates soften, the
importance of Catlin's technical approach to underwriting, involving embedded
actuarial support and active cycle management, increases. This approach includes
a well-established and sophisticated rate monitoring process in place since
2001.
Despite the decrease in average weighted premiums rates during the first half,
margins during the period remained strong. The table below shows the rate
indexes for various categories of business since 1999:
1999 2000 2001 2002 2003 2004 2005 2006 2007
Energy rating 100% 111% 147% 240% 302% 277% 282% 383% 368%
Property Direct rating 100% 107% 137% 187% 201% 197% 192% 218% 210%
Property Reinsurance 100% 104% 120% 161% 168% 166% 165% 209% 219%
Catastrophe aggregate 100% 107% 135% 189% 208% 202% 201% 246% 246%
Marine and Property 100% 102% 143% 181% 201% 210% 213% 218% 214%
War & Political Risk 100% 102% 131% 230% 240% 226% 212% 207% 194%
Specialty 100% 106% 119% 143% 156% 159% 160% 160% 160%
Casualty 100% 103% 138% 177% 227% 242% 238% 229% 221%
Aerospace 100% 107% 116% 135% 134% 135% 131% 122% 110%
Non-catastrophe aggregate 100% 103% 136% 177% 203% 211% 208% 201% 193%
Rating index base = 100 in 1999
All four Catlin underwriting platforms - the Catlin Syndicate at Lloyd's, Catlin
Bermuda, Catlin UK and Catlin US - performed well during the period, and all
four produced underwriting contributions. Analysis of the business on a
segmental basis can be found in Note 2 to the Consolidated Financial Statements.
The Group continues to seek new business opportunities, both to increase premium
volume and profitability and to continue to diversify our book of business.
Absent a major catastrophic event in the latter half of 2007, the Group expects
a tougher pricing environment in 2008, but also believes that rates as a whole
will continue to be more than adequate and that rates will increase for some
classes of business.
Catlin US
Catlin US was established in 2006 to take advantage of attractive prospects in
the US market that would not be available to a UK or a Bermuda-based company.
Catlin US has developed into a diversified insurance and reinsurance operation
that retains the Catlin Group's strong underwriting culture and focus on gross
profitability. The Group intends to enlarge Catlin US through the addition of
high-quality, specialist underwriting teams and through controlled, responsible
premium growth.
The development of Catlin US accelerated during the first half of 2007. During
the period:
•The integration of the small existing Catlin US operations with
Wellington's larger US unit was completed;
•Several new specialty classes of business were established through the
addition of high-quality underwriting teams;
•The underwriting and financial infrastructure of the unit was
strengthened; and
•Catlin US's two owned insurance companies received 'A' (Excellent)
financial strength ratings from A.M. Best.
Catlin US originated business (written either by Catlin US's insurance companies
or by other Catlin Group underwriting platforms) increased by 42 per cent to
US$136 million (30 June 2006: US$96 million combined). Of this, US$29 million
(30 June 2006: US$20 million combined) was written by the Catlin US insurance
companies; this is the amount included in the 'Catlin US' segment in the
segmental information.
Gross premiums written in the first half and planned for the entire year have
been impacted by the decision to terminate a large contractor facility because
of concerns over rate adequacy, which reduces estimated gross premiums written
for 2007 by $55 million.
The Group now anticipates that Catlin US-originated business will total
approximately US$350 million in gross premiums during 2007, down from its
previous estimate of approximately US$450 million. Of that amount, approximately
US$140 million will be direct business, whilst US$210 million will be
reinsurance.
During the period Catlin US established new offices in Cleveland, Ohio, and
Lexington, Kentucky, and began underwriting inland marine, equine and product
recall insurance. In addition, Catlin US continued to develop the professional
liability and primary/excess casualty classes of business which it established
during the second half of 2006.
Besides these new specialties, Catlin US also underwrites medical malpractice
insurance and insurance for smaller- to medium-size enterprises through general
agents. Classes of reinsurance business underwritten by Catlin US include direct
and brokerage property facultative, property treaty, marine, and accident and
health.
In July, A.M. Best announced that it had assigned a financial strength rating of
'A' (Excellent) to Catlin Insurance Company Inc. and upgraded the financial
strength rating of Catlin Specialty Insurance Company Inc. to 'A' (Excellent)
from 'A-' (Excellent). The rating assigned to Catlin Insurance Company, an
admitted insurer that Catlin acquired in 2006, allowed the company to begin
writing business, while the upgraded rating assigned to Catlin Specialty, which
was acquired with Wellington, increases the company's standing in the
marketplace. Both companies are included in Financial Size Category XIII ($1.25
billion to $1.5 billion).
International Offices
Catlin's network of international offices is an integral part of the Group's
strategy to broaden its distribution network and diversify its risk portfolio.
During the first half, the Group established four new European offices in Paris,
Barcelona, Zurich and Innsbruck. In addition, Catlin established a presence in
Shanghai as a participant in Lloyd's Reinsurance Company (China) Ltd, a
reinsurance operation owned by Lloyd's which opened for business in April 2007.
Additional underwriting teams and resources have been added to Catlin's existing
international offices in Europe, Canada, Asia and Australia. Combined, Catlin's
international offices wrote US$86 million in gross premiums during the first
half, putting the group on track to reach its previously announced estimate of
US$150 million (31 December 2006: US$106 million).
Dividend
Catlin is committed to providing an attractive return to shareholders through
the dividend, and dividend payments are linked to recent trends in the Group's
performance as well as to future prospects. The Board of Directors has declared
a dividend of 8.1 pence per share (16.4 US cents), payable on 9 November 2007 to
shareholders of record at the close of business on 12 October 2007. This payment
represents a 35 per cent increase over Catlin's 2006 interim dividend of 6.0
pence (11.3 US cents) per share and is a 5 per cent increase over the implied
interim element of the 2006 full-year dividend of 23 pence (44.1 US cents).
Outlook
The Group has made excellent progress since the acquisition of Wellington, and
we are confident this progress will continue during the second half of 2007 and
during 2008. Whilst Catlin faces a tougher market with increased competition, we
believe that margins will remain good in the specialty classes of business that
we underwrite and in the classes that we are targeting for future growth.
The advantages provided by the Wellington acquisition will continue to increase.
We have already benefited from the increased scale of the Group and will
continue to do so. The financial benefits of the acquisition will increase
during the second half, and we expect the acquisition will be earnings accretive
for 2007 and subsequent years. Acquisition-related synergies during 2007 have
exceeded our expectations, and we now expect to realise at least US$100 million
in synergies after tax in 2008.
We are on track to meet our financial targets in 2007. We see further growth
opportunities in 2008 and beyond, especially in the United States and through
our international offices. We will also benefit further in 2008 from the
embedded growth provided by the acquisition. In short, Catlin continues to look
ahead with confidence.
Stephen Catlin
Chief Executive
Catlin Group Limited
Consolidated Balance Sheets
As at 30 June 2007 and 2006 and 31 December 2006
(US dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
30 June 2007 31 December 30 June 2006
(unaudited) 2006 (audited) (unaudited)
Assets
Investments
Fixed maturities, available-for-sale, at fair value
(amortised cost 2007: $2,593,883; Dec 2006:
$2,685,960; June 2006: $1,735,282) $2,556,901 $2,669,437 $1,693,718
Short-term investments, at fair value 78,650 27,565 8,198
Investment in funds 388,403 326,208 -
Investment in associate 2,306 2,617 2,498
Total investments 3,026,260 3,025,827 1,704,414
Cash and cash equivalents 2,327,899 1,987,882 794,497
Securities lending collateral 41,434 130,854 209,137
Accrued investment income 38,738 32,136 17,536
Premiums and other receivables 1,504,006 987,768 768,133
Reinsurance recoverable (net of allowance of 2007: 1,070,381 1,237,531 522,420
$66,070; Dec 2006: $46,791; June 2006: $27,312)
Reinsurers' share of unearned premiums 369,739 104,731 112,103
Deferred policy acquisition costs 264,014 144,063 151,920
Value of in-force business acquired 63,559 118,384 -
Intangible assets and goodwill 889,250 868,026 72,491
Derivatives, at fair value 9,924 46,037 -
Other assets 124,823 123,079 50,706
Total assets $9,730,027 $8,806,318 $4,403,357
Liabilities, Minority Interest and Stockholders'
Equity
Liabilities:
Reserves for losses and loss expenses $4,240,718 $4,005,133 $1,950,583
Unearned premiums 1,819,727 1,290,379 872,898
Deferred gain - - 1,294
Reinsurance payable 506,347 192,958 138,670
Accounts payable and other liabilities 129,101 363,399 71,275
Notes payable - 550,290 50,000
Subordinated debt 99,525 99,936 -
Derivatives, at fair value 6,147 619 -
Securities lending payable 41,434 130,854 209,137
Deferred taxes 183,696 153,721 17,559
Total liabilities $7,026,695 $6,787,289 $3,311,416
Minority interest 751 749 727
30 June 2007 31 December 30 June 2006
(unaudited) 2006 (audited) (unaudited)
Stockholders' equity:
Ordinary common shares, par value $0.01
Authorised 400,000,000; issued and outstanding
2007: 252,950,106; Dec 2006: 238,283,281; June
2006: 163,633,683) $2,530 $2,383 $1,636
Preferred shares, par value $0.01
Authorised 600,000; issued and outstanding 589,785 - -
Additional paid-in capital 1,615,474 1,610,725 791,859
Treasury stock (4,033) (6,600) (552)
Accumulated other comprehensive loss (12,751) (26,090) (46,983)
Retained earnings 511,576 437,862 345,254
Total stockholders' equity 2,702,581 2,018,280 1,091,214
Total liabilities, minority interest and $9,730,027 $8,806,318 $4,403,357
stockholders' equity
Approved by the Board of Directors on 5 September 2007
Stephen Catlin, Director
Christopher Stooke, Director
Catlin Group Limited
Consolidated Statements of Operations (unaudited)
For the six months ended 30 June 2007 and 2006
(US dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
2007 2006
Revenues
Gross premiums written $1,997,507 $903,145
Reinsurance premiums ceded (551,836) (137,152)
Net premiums written 1,445,671 765,993
Change in net unearned premiums (253,459) (123,510)
Net premiums earned 1,192,212 642,483
Net investment income 131,052 51,922
Net realised losses on investments (14,299) (7,633)
Change in fair value of derivatives (5,528) -
Net realised gains on foreign currency exchange 10,913 28,314
Other income 10,894 172
Total revenues 1,325,244 715,258
Expenses
Losses and loss expenses 652,601 316,564
Policy acquisition costs 296,866 157,157
Administrative expenses 150,426 61,790
Other expenses 35,102 12,348
Total expenses 1,134,995 547,859
Income before minority interest and income tax expense 190,249 167,399
Minority interest 8 -
Income tax expense (28,537) (20,089)
Net income $161,720 $147,310
Earnings per common share
Basic $0.65 $0.92
Diluted $0.61 $0.85
Catlin Group Limited
Consolidated Statements of Changes in Stockholders' Equity and
Accumulated Other Comprehensive Income (unaudited)
For the six months ended 30 June 2007 and 2006
(US dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
Preferred Additional Treasury Retained Accumulated Total
stock paid-in stock earnings stockholders'
Common capital other equity
stock comprehensive
income (loss)
Balance 1 January 2006 $1,559 $- $721,935 $- $228,986 $(21,399) $931,081
Comprehensive income:
Net income - - - - 147,310 - 147,310
Other comprehensive loss - - - - - (25,584) (25,584)
Total comprehensive - - - - 147,310 (25,584) 121,726
income/(loss)
Equity raise 77 - 65,154 - - - 65,231
Stock compensation - - 3,975 - - - 3,975
expense
Stock options and - - - - - - -
warrants exercised
Dividends declared - - - - (30,247) - (30,247)
Deferred compensation - - 795 - (795) - -
obligation
Treasury stock purchased - - - (552) - - (552)
Balance 30 June 2006 $1,636 $- $791,859 $(552) $345,254 $(46,983) $1,091,214
Balance 1 January 2007 $2,383 $- $1,610,725 $(6,600) $437,862 $(26,090) $2,018,280
Comprehensive income:
Net income - - - - 161,720 - 161,720
Other comprehensive - - - - - 13,339 13,339
income
Total comprehensive - - - - 161,720 13,339 175,059
income
Issuance of common 117 - (117) - - - -
shares in connection
with acquisition of
Wellington
Issuance of preferred - 589,785 - - - - 589,785
shares
Stock compensation - - 7,515 - - - 7,515
expense
Stock options and 30 - (30) - - - -
warrants exercised
Dividends declared - - - - (85,461) - (85,461)
Deferred compensation - - 2,545 - (2,545) - -
obligation
Treasury stock purchased - - (2,597) - - (2,597)
Distribution of treasury - - (5,164) 5,164 - - -
stock held by Employee
Benefit Trust
Balance 30 June 2007 $2,530 $589,785 $1,615,474 $(4,033) $511,576 $(12,751) $2,702,581
Catlin Group Limited
Consolidated Statements of Cash Flows (unaudited)
For the six months ended 30 June 2007 and 2006
(US dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
2007 2006
Cash flows provided by operating activities $161,720 $147,310
Net income
Adjustments to reconcile net income to net cash provided by
operations:
Amortisation and depreciation 8,008 4,213
Amortisation of discounts of fixed maturities (3,306) (7,244)
Net realised losses on investments 7,277 7,633
Changes in operating assets and liabilities
Reserves for losses and loss expenses 132,131 (176,092)
Unearned premiums 500,515 161,479
Premiums and other receivables (465,467) (143,052)
Deferred policy acquisition costs (116,838) (16,328)
Value in-force business acquired 56,900 -
Reinsurance payable 287,042 (79,589)
Reinsurance recoverable 184,614 151,499
Reinsurers' share of unearned premiums (250,295) (52,145)
Deposit with reinsurer (221) (20,583)
Deferred gain - (12,408)
Accounts payable and other liabilities (186,725) 68,732
Investment in funds (62,277) -
Deferred tax 23,931 1,456
Other 2,012 70,460
Net cash flows provided by operating activities 279,021 105,341
Cash flows provided by/(used in) investing activities
Purchases of fixed maturities (1,593,924) (644,684)
Purchases of short-term investments (145,812) (46,760)
Proceeds from sales of fixed maturities 1,657,937 689,361
Proceeds from maturities of fixed maturities 108,456 5,410
Proceeds from sales of short-term investments 84,837 12,738
Proceeds from maturities of short-term investments 10,422 -
Other investments (39,845) -
Purchase of intangible assets (67) (3,578)
Purchases of property and equipment (7,772) (3,149)
Proceeds from sales of property and equipment 7 72
Investment of securities lending collateral, net 89,537 (209,137)
Net cash flows provided by/(used in) investing activities 163,776 (199,727)
2007 2006
Cash flows provided by/(used in) financing activities
Net proceeds from issue of common shares - $65,786
Net proceeds from issue of preference shares 589,785 -
Dividends paid on common shares (85,459) (30,037)
Proceeds from notes payable - 150,000
Repayment of notes payable (550,290) (150,000)
Securities lending collateral (repaid)/received (89,537) 209,137
Purchase of treasury stock (2,597) (552)
Net cash flows provided by/(used in) financing activities (138,098) 244,334
Net increase in cash and cash equivalents 304,699 149,948
Cash and cash equivalents - beginning of period 1,987,882 609,857
Effect of exchange rate changes 35,318 34,692
Cash and cash equivalents - end of period 2,327,899 $794,497
Supplemental cash flow information
Taxes paid $5,993 $18
Interest paid $7,986 $1,378
Cash and cash equivalents comprise the following:
Cash at bank and in hand $2,196,930 $793,232
Cash equivalents $130,969 $1,265
Catlin Group Limited
Notes to the Consolidated Financial Statements (unaudited)
For the six months ended 30 June 2007 and 2006
(US dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
1 General
Basis of presentation
The unaudited interim consolidated financial statements have been prepared in
accordance with the accounting policies set out in the consolidated financial
statements for the year ended 31 December 2006.
Business combination
Following the acquisition of Wellington Underwriting plc ('Wellington') on 18
December 2006, the statement of operations reflects the results of the
enlarged Group. Comparative figures do not include the results of Wellington
prior to the acquisition.
Preferred shares
On 18 January 2007, Catlin Group Limited (the 'Group'), through Catlin
Insurance Company Limited ('Catlin Bermuda'), issued $600,000 of
non-cumulative perpetual preferred shares at a dividend rate of 7.249 per
cent, as described in Note 9.
New accounting pronouncements
In June 2006, the Financial Accounting Standards Board ('FASB') issued FASB
Interpretation No. 48, 'Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109', ('FIN 48'). FIN 48 provides
guidance on financial statement recognition, measurement and disclosure of
uncertain tax positions. FIN 48 is effective for fiscal years beginning after
15 December 2006. The Group adopted the provisions of FIN 48 effective 1
January 2007. There were no changes to the Group's financial position as a
result of adopting FIN 48. The Group's tax uncertainties are described in
Note 8.
2 Segmental information
Following the acquisition of Wellington in December 2006, Catlin has made
certain changes to its segmental reporting to reflect the manner in which
results are now reviewed by management.
In 2006, Catlin had four reportable segments: Catlin Syndicate Direct, Catlin
Syndicate Reinsurance, Catlin Bermuda and Catlin UK. From 2007, Catlin Syndicate
Direct and Catlin Syndicate Reinsurance have been combined into a single
segment, and Catlin US has been added as an additional reportable segment.
Comparative segmental disclosures have been restated accordingly. Catlin US did
not generate business in its own right in 2006, and is consequently not shown
separately in the comparative disclosures.
In 2006, segment result was based on income or loss before income tax expense.
From 2007, segment result is based on net premiums earned less losses, loss
expenses and brokerage costs.
In 2006, segment revenue and results included the effects of intra-Group
reinsurance. From 2007, segment revenue and results are stated prior to the
effects of intra-group reinsurance and therefore reflect reinsurance with
external parties only.
Catlin determines its reportable segments by platform, consistent with the
manner in which results are reviewed by management. The four reportable segments
are:
• Catlin Syndicate, which comprises direct insurance and reinsurance
business underwritten by the Catlin Syndicate at Lloyd's;
• Catlin Bermuda, which primarily underwrites reinsurance business,
including intra-Group reinsurance;
• Catlin UK, which primarily underwrites direct insurance; and
• Catlin US, which primarily underwrites speciality business in the United
States.
At 30 June 2007, there were four intra-Group reinsurance contracts in place: the
50% Corporate Quota Share ('CQS'), which cedes Catlin Syndicate risk to Catlin
Bermuda, the 60% Quota Share contract ('CUK QS') which cedes Catlin UK risk to
Catlin Bermuda and also two 75% Quota Share contract ('CUS QS') which cede
Catlin US risk to Catlin Bermuda. The Qualifying Quota Share ('QQS') contract on
the 2004 Year of Account and the Long Tail Stop Loss ('LTSL') between Catlin
Syndicate and Catlin Bermuda have not been renewed however there is still some
movement in 2007 on these contracts as the covered years continue to develop.
The effects of each of these reinsurance contracts are excluded from segmental
revenue and results, as this is the basis upon which the performance of each
segment is assessed.
Net underwriting contribution by operating segment for the period ended 30 June
2007 is as follows:
Catlin Catlin Catlin Catlin Total
Syndicate Bermuda UK US
Gross premiums written $1,547,246 $229,483 $191,306 $29,472 $1,997,507
Reinsurance premiums (460,042) (46,134) (41,762) (3,898) (551,836)
ceded
Net premiums written 1,087,204 183,349 149,544 25,574 1,445,671
Net premiums earned 939,512 94,561 134,902 23,237 1,192,212
Losses and loss expenses (517,424) (52,132) (67,557) (15,488) (652,601)
Brokerage and (209,653) (15,766) (33,309) (3,489) (262,217)
commissions
Net underwriting $212,435 $26,663 $34,036 $4,260 $277,394
contribution
Net underwriting contribution by operating segment for the period ended 30 June
2006 is as follows:
Catlin Catlin Catlin Total
Syndicate Bermuda UK
Gross premiums written $659,774 $126,743 $116,632 $903,149
Reinsurance premiums ceded (109,523) (5,944) (21,685) (137,152)
Net premiums written 550,251 120,799 94,947 765,997
Net premiums earned 446,401 94,421 101,662 642,484
Losses and loss expenses (200,063) (40,112) (76,387) (316,562)
Brokerage and commissions (92,952) (16,785) (23,212) (132,949)
Net underwriting contribution $153,386 $37,524 $2,063 $192,973
Total revenue is the total of net premiums earned as disclosed above, plus net
investment income and net realised gain/(loss) on investments, net realised gain
/(loss) on foreign currency exchange, and other income. Only net premiums earned
are measured and managed on a segmental basis.
3 Investments
Fixed maturities
The fair values and amortised costs of fixed maturities at 30 June 2007 and 2006
are as follows:
2007 2006
Fair Amortised Fair Amortised
Value Cost Value Cost
US government and agencies $617,871 $629,194 $857,888 $886,125
Non-US governments 261,335 266,343 334,325 340,053
Corporate securities 432,725 437,893 235,395 240,044
Asset-backed securities 470,866 476,441 73,475 74,434
Mortgage-backed securities 774,104 784,012 192,635 194,626
Total fixed maturities $2,556,901 $2,593,883 $1,693,718 $1,735,282
The gross unrealised gains and losses related to fixed maturities at 30 June
2007 and 2006 are as follows:
2007 2006
Gross Gross Gross Gross
unrealised unrealised unrealised unrealised
gains losses gains losses
US government and agencies $81 $11,405 $- $28,238
Non-US governments 42 5,049 42 5,769
Corporate securities 126 5,295 27 4,676
Asset-backed securities 90 5,664 45 1,004
Mortgage-backed securities 613 10,521 59 2,050
Total fixed maturities $952 $37,934 $173 $41,737
There were no other than temporary declines in the value of investments in the
six months to 30 June 2007 (2006: $nil). The net realised losses on fixed
maturities for the six months ended 30 June 2007 were $7,777 (2006: $7,399).
Fixed maturities at 30 June 2007, 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 Amortised
value cost
Due in one year or less $29,674 $29,826
Due after one through five years 963,960 974,787
Due after five years through ten years 302,751 312,603
Due after ten years 15,546 16,214
1,311,931 1,333,430
Asset-backed securities 470,866 476,441
Mortgage-backed securities 774,104 784,012
Total $2,556,901 $2,593,883
Investment in funds
The Group has classified its investment in funds as a trading security and,
accordingly, all realised and unrealised gains and losses on this investment are
recorded in net income in the consolidated statements of operations. This
investment comprises investments in a fixed maturities fund, an equity fund and
a fund of hedge funds. The change in fair value of the investment in funds is
recorded as net investment income. The amount of net investment income for the
six months ended 30 June 2007 that relates to investment in funds still held at
30 June 2007 was $14,633 (2006: $nil).
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 or guarantees for Letters
of Credit ('LOC'), as described in Note 7. Finally, the Group also utilises
trust funds where the trust funds are set up for the benefit of the ceding
companies, and generally take the place of LOC requirements.
The total value of these restricted assets by category at 30 June 2007 and 2006
are as follows:
2007 2006
Fixed maturities, available for sale $1,798,998 $916,148
Short term investments 2,406 8,198
Cash and cash equivalents 644,278 136,752
Total restricted assets $2,445,682 $1,061,098
Securities lending
The Group participates in a securities lending program 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 $40,338 (2006: $206,997) of securities on loan at 30 June 2007.
4 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 claims for 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 they have made a reasonable estimate
of the level of reserves at 30 June 2007 and 2006.
The reconciliation of unpaid losses and loss expenses for the six months ended
30 June 2007 and 2006 is as follows:
2007 2006
Gross unpaid losses and loss expenses,
beginning of year $4,005,133 $1,995,485
Reinsurance recoverable on unpaid loss and loss
expenses (996,896) (575,522)
Net unpaid losses and loss expenses, beginning
of year 3,008,237 1,419,963
Net incurred losses and loss expenses for
claims related to:
Current year 667,994 320,765
Prior years (15,393) (4,201)
Total net incurred losses and loss expenses 652,601 316,564
Net paid losses and loss expenses for claims
related to:
Current year (124,013) (24,047)
Prior year (475,792) (271,115)
Total net paid losses and loss expenses (599,805) (295,162)
Loss portfolio transfer 172,387 -
Foreign exchange and other 106,486 53,421
Net unpaid losses and loss expenses, end of
period 3,339,906 1,494,786
Reinsurance recoverable on unpaid loss and loss
expenses 900,812 455,797
Gross unpaid losses and loss expenses, end of
period $4,240,718 $1,950,583
As a result of the changes in estimates of insured events in prior years, the
2007 reserve for losses and loss expenses net of reinsurance recoveries
decreased by $15,393 (2006: decrease of $4,201). In 2007 and 2006, the decrease
was due to changes in estimates of insured events in previous years resulting
from reductions of expected ultimate loss costs, settlement of losses at amounts
below previously estimated loss costs and reduction in uncertainty surrounding
the quantification of the net cost of claim events.
Loss portfolio transfer
During the period, Syndicate 2020 closed the 2004 Lloyd's underwriting year of
account by way of a Lloyd's reinsurance to close. In closing the 2004 year of
account, all outstanding losses were transferred into the 2005 year of account.
The Group had an additional ownership of approximately 10% acquired from the
external Names in respect of the 2005 year of account, which resulted in an
increase in loss reserves of $172,387; this has been treated as a loss portfolio
transfer. To the extent that the future run-off of the 2004 year of account
differs from what has been recorded, that development will be recorded in the
Consolidated Statement of Operations in the period that it is incurred.
5 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:
2007 2006
Premiums Premiums Premiums Premiums
written earned written earned
Direct $1,392,546 $1,132,765 $582,153 $493,821
Assumed 604,961 348,637 320,992 221,717
Ceded (551,836) (289,190) (137,152) (73,055)
Net premiums $1,445,671 $1,192,212 $765,993 $642,483
6 Derivative financial instruments
Catastrophe swap agreement
On 17 November 2006, Catlin Bermuda entered into a catastrophe swap agreement
('Cat Swap') that provides up to $200,250 in coverage in the event of a series
of natural catastrophes. Catlin Bermuda's counterparty in the Cat Swap is a
special purpose vehicle, Bay Haven Limited ('Bay Haven'). Bay Haven has issued
to investors $200,250 in three-year floating rate notes, divided into Class A
and Class B notes. The proceeds of those notes provide the collateral for Bay
Haven's potential obligations to Catlin Bermuda under the Cat Swap.
The Cat Swap responds to certain covered risk events occurring during a
three-year period. No payment will be made for the first three such risk events.
Bay Haven will pay Catlin Bermuda $33,375 per covered risk event thereafter, up
to a maximum of six events. The aggregate limit potentially payable to Catlin
Bermuda is $200,250.
In addition, on 17 November 2006 Catlin Bermuda entered into a further
catastrophe swap agreement with ABN AMRO Bank N.V. London Branch which will
respond to the third covered risk event (that is, the covered risk event before
the Class B notes are triggered). The terms are otherwise as described for the
Class A and Class B notes, except that the limit payable is $46,500.
The Cat Swap falls within the scope of Statement of Financial Accounting
Standards No. 133 ('Accounting for Derivative Instruments and Hedging
Activities' as amended ('SFAS 133') and is therefore measured in the balance
sheet at fair value with any changes in the fair value included in earnings. As
at 30 June 2007, the fair value of the Cat Swap is a liability of $6,147.
Other derivative instruments
The Group holds various foreign currency derivatives (forward contracts, caps
and collars). As at 30 June 2007, the fair value of the foreign currency
derivatives was $9,924, of which $6,308 had a remaining term of less than 12
months.
In March 2007 the Group exercised the share options it held with respect to
Aspen Insurance Group. Following the exercise of the options to purchase
3,781,120 shares on a cash-less basis at an exercise price of $22.52 and a share
price of $25.38, Wellington received 426,083 shares. The sale of the shares
began 30 March and was completed on 12 April 2007. The resulting sale resulted
in a capital loss of $6,354 from the 31 December 2006 valuation, which has been
included in net realised losses on investments in the Consolidated Statements of
Operations.
7 Notes payable, debt and financing arrangements
The Group's outstanding debt as at 30 June 2007 and 2006 consisted of the
following:
2007 2006
Notes payable
Revolving bank facility $- $50,000
Total notes payable - 50,000
Subordinated debt
Variable rate, face amount /xA47,000, due 15 March 2035 10,133 -
Variable rate, face amount $27,000, due 15 March 2036 29,021 -
Variable rate, face amount $31,300, due 15 September 2036 33,791 -
Variable rate, face amount $9,800, due 15 September 2036 10,580 -
Variable rate, face amount /xA411,000, due 15 September 2036 16,000 -
Total subordinated debt 99,525 -
Total debt $99,525 $50,000
Subordinated debt
On 12 May 2006 Wellington Underwriting plc (which has been subsequently renamed
'Catlin Underwriting') issued $27,000 and /xA47,000 of variable rate unsecured
subordinated notes. The notes are subordinated to the claims of all Senior
Creditors, as defined in the agreement. The notes pay interest based on the rate
on three-month deposits in US dollars plus a margin of 317 basis points for the
Dollar note and 295 basis points for the Euro note. Interest is payable
quarterly in arrears. The notes are redeemable at the discretion of the issuer
beginning on 15 March 2011 with respect to the Dollar notes and 22 May 2011 with
respect to the Euro notes.
On 20 July 2006 Wellington Underwriting plc issued $31,300, $9,800 and
/xA411,000 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 $31,300 notes and 300 basis points for
the other two notes. Interest is payable quarterly in arrears. The notes are
each redeemable at the discretion of the issuer on 15 September 2011.
Bank facilities
Since November 2003, the Group has participated in a Letter of Credit/Revolving
Loan Facility (the 'Club Facility') with three, and since 15 December 2006, four
banks. Each bank participates equally in the Club Facility. The Club Facility is
comprised of three tranches as detailed below. The Club Facility has been
varied, amended and restated since it was originally entered into, most recently
on 15 December 2006 when the credit available under the Club Facility increased
from $250,000 and £150,000 to $400,000 and £275,000, respectively. The following
amounts were outstanding under the Club Facility as at 30 June 2007:
• Debt outstanding, in the form of a 364-day $50,000 revolving facility
with a one-year term-out option ('Facility A'), was $nil. Facility A, while
not directly collateralised, is secured by floating charges on Group assets
and cross-guarantees from material subsidiaries (together with Facilities B
and C). This loan, outstanding at 30 June 2006, was repaid including
interest on 22 January 2007.
• Clean, irrevocable standby LOC's of $452,250 (£225,000) are provided to
support the Catlin Syndicate's underwriting at Lloyd's ('Facility B'). As
at 30 June 2007, the Catlin Syndicate has utilised Facility B and deposited
with Lloyd's an LOC in the amount of $452,250 (£225,000). In the event that
the Catlin Syndicate fails to meet its obligations under policies of
insurance written on its behalf, Lloyd's could draw down this letter of
credit. This LOC has an initial expiry date of 27 November 2010. Collateral
of $80,400 (£40,000) was provided in 2007.
• A two-year $350,000 standby LOC facility is available for utilisation by
Catlin Bermuda and Catlin UK ('Facility C'). It is split into two equal
tranches of $175,000 with the first being fully secured by OECD Government
Bonds, US Agencies and or cash discounted at varying rates. The second
tranche is unsecured. At 30 June 2007, $101,617 in LOC's were outstanding,
of which $98,250 are issued for the benefit of Catlin Bermuda, with a
single LOC of $3,367 (£1,675) being for the benefit of Catlin UK.
$31,523 of the LOC's were issued on an unsecured basis.
The terms of the Club Facility require that certain financial covenants be met
on a quarterly basis through the filing of Compliance Certificates. These
include maximum levels of possible exposures to realistic disaster scenarios for
the Group, as well as requirements to maintain minimum Tangible Net Worth and
Adjusted Tangible Net Worth levels, the calculations of which are based upon
fixed amounts in 2006 and increase over time, for items such as consolidated net
income in future accounting periods. The Group is in compliance with all
covenants during 2007.
8 Taxation
Bermuda
Under current Bermuda law neither the Company nor its Bermuda subsidiary, Catlin
Bermuda, are required to pay any taxes in Bermuda on their income or capital
gains. Both the Company and Catlin Bermuda have received undertakings from the
Minister of Finance in Bermuda that, in the event of any taxes being imposed,
they will be exempt from taxation in Bermuda until March 2016.
United Kingdom
The Group also operates in the UK through its UK subsidiaries and the income of
the UK companies is subject to UK corporation taxes.
Income from the Group's operations at Lloyd's is also subject to US income
taxes. Under a Closing Agreement between Lloyd's and the Internal Revenue
Service (IRS), Lloyd's Members pay US income tax on US connected income written
by Lloyd's syndicates. US income tax due on this US connected income is
calculated by Lloyd's and remitted directly to the Internal Revenue Service 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 tax 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 US through its US subsidiaries and their income
is subject to both US state and federal income taxes.
Other international income taxes
The Group has a network of international operations, and they also are subject
to income taxes imposed by the jurisdictions in which they operate, but they do
not constitute a material component element 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 six months ended 30 June 2007 and 2006 is as
follows:
2007 2006
Current tax expense $- $18,296
Deferred tax expense 28,537 1,793
Income tax expense $28,537 $20,089
Unrecognised tax benefits
On adoption of FIN 48 as at 1 January 2007, the total amount of the Group's
unrecognised tax benefits was $11,201. As at 30 June 2007, this amount was
$2,269. All unrecognised tax benefits would affect the effective tax rate if
recognised.
The Group does not believe it would be subject to any penalties in any open tax
years and has not accrued any such amounts. The Group accrues interest and
penalties (if applicable) as income tax expenses in the financial statements.
The following table lists the open tax years that are still subject to
examination by local tax authorities in major tax jurisdictions:
Major tax jurisdiction Years
United Kingdom 2004-2006
United States 2004-2006
9 Stockholders' equity
The following is a detail of the number and par value of shares authorised,
issued and outstanding as at 30 June 2007 and 2006:
Authorised Issued and outstanding
Number Par Number Par
of shares value of shares value
$000 $000
Ordinary common shares,
par value $0.01 per share
As at 30 June 2007 400,000,000 $4,000 252,950,106 $2,530
As at 30 June 2006 250,000,000 $2,500 163,633,683 $1,636
Preference shares, par value
$0.01 per share
As at 30 June 2007 600,000 $1,000 600,000 $1,000
The following table outlines the changes in common shares issued and outstanding
during 2007 and 2006:
2007 2006
Balance, 1 January 238,283,281 155,914,616
Exercise of stock options and warrants 2,987,188 14,167
Equity raise - 7,704,900
Business combination 11,679,637 -
Balance, 30 June 252,950,106 163,633,683
Equity raise
On 14 March 2006, the Group placed 7,704,900 new common shares with par value of
$0.01 each at $8.68 (£5.00) per share, raising $65,231 net of expenses.
Business combination
As at 31 December 2006 acceptances totalling 88 per cent of Wellington's share
capital subject to the Group's offer to acquire Wellington ('the Offer') had
been settled, resulting in an issuance of 74,414,657 common shares. The
remaining Wellington shares subject to the Offer were settled in 2007, resulting
in a further issuance of 11,679,637 shares.
Preferred shares
On 18 January 2007, Catlin Bermuda issued $600,000 of non-cumulative perpetual
preferred shares, par value of $0.01 per share, with liquidation preference of
$1,000 per share, plus declared and unpaid dividends. Dividends are payable
semi-annually in arrears only if, as and when declared by the Board of
Directors, on 19 January and 19 July, commencing on 19 July 2007, at a rate of
7.249 per cent on the liquidation preference, up to but not including 19 January
2017. Thereafter, if the shares have not yet been redeemed, dividends will be
payable quarterly at a rate equal to 2.975 per cent plus the 3-month LIBOR Rate
of the liquidation preference. Catlin Bermuda received proceeds of approximately
$589,785, net of issuance costs, which were used to repay a $500,000 bridge
facility as well as Facility A described in Note 7, and for general corporate
purposes. The preference 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 shares on the open
market. These shares will ultimately be distributed to PSP holders to the extent
that the PSP awards vest. During 2007, the Group, through the EBT, purchased
267,400 of the Group's shares, at an average price of $9.72 (£4.91) per share.
The total amount paid of $2,597 is shown as a deduction to stockholders' equity.
In conjunction with the Wellington acquisition, the Group agreed to compensate
legacy Wellington employees that held units in the Wellington EBT. There were no
costs associated with the distribution of the Group shares.
Dividends
On 8 June 2007, the Group paid a final dividend on the common shares relating to
the 2006 financial year of $0.328 (£0.17) per share to shareholders of record at
the close of business on 11 May 2007. The total dividend paid for the 2006
financial year was $0.441 (£0.23) per share.
10 Employee stock compensation schemes
The Group has two stock compensation schemes in place under which awards are
outstanding: the PSP, which was adopted in 2004, and a Long Term Incentive Plan
('LTIP'), adopted in 2002. These financial statements include the total cost of
stock compensation for both plans, calculated using the fair value method of
accounting for stock-based employee compensation. The total cost of the plans
expensed in the six months ended 30 June 2007 was $7,515 (2006: $3,975).
On 9 March 2007, a total of 2,721,517 options with $nil exercise price and
518,999 non-vested shares (total of 3,240,516 securities) were granted to Group
employees under the PSP. Up to half of the securities will vest on 9 March 2010
and up to half will vest on 9 March 2011, subject to certain performance
conditions.
11 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to
common shareholders by the weighted average number of common shares in issue
during the year.
Diluted earnings per share is calculated by dividing the earnings attributable
to all shareholders by the weighted average number of common shares in issue
adjusted to assume conversion of all dilutive potential common shares.
The company has the following potentially dilutive instruments outstanding
during the periods presented:
(i) PSP;
(ii) LTIP; and
(iii) Warrants
There is no difference between net income attributable to ordinary stockholders
and net income attributable to all stockholders for the six months ended 30 June
2007 and 2006.
Reconciliations of the number of shares used in the calculations are set out
below.
2007 2006
Weighted average number of shares 247,566,159 160,688,316
Dilution effect of warrants 4,594,329 6,203,859
Dilution effect of stock options and non-vested shares 9,991,124 6,930,990
Dilution effect of stock options and warrants exercised in 1,593,878 8,106
the period
Weighted average number of shares on a diluted basis 263,745,490 173,831,271
Earnings per common share
Basic $0.65 $0.92
Diluted $0.61 $0.85
Options to purchase a further 9,624,670 shares (2006: 9,885,557) under the LTIP
were outstanding during the period but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares.
12 Subsequent events
On 17 July 2007, the Board of Catlin Bermuda approved a dividend of $21,747 to
the shareholders of the non-cumulative perpetual preference shares. This
dividend was paid on 19 July 2007.
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