Catlin Group ltd - 09.03.07

Catlin Group Limited has announced to day its prelims for the 2006 year. We have extracted various portions as follows:-

Underwriting
   • Strong underwriting performance in 2006 for Catlin and Wellington;
   • Catlin and Wellington reduced catastrophe exposures; nevertheless, both     portfolios grew strongly;
   • Broadly constant split of premium volume between catastrophe exposed and non-catastrophe business.

Outlook:
   • Estimated written premium for January 2007 renewal season slightly above combined 2006 volumes for same period;
   • Rates for catastrophe exposed business expected to remain firm;
   • Rates for non-catastrophe exposed business expected to decrease, but     margins should remain good;
   • Catlin will continue to expand non-catastrophe exposed portfolio.

“The acquisition of Wellington is a watershed in Catlin's evolution. The Catlin Syndicate now ranks as the largest syndicate at Lloyd's in terms of premium capacity, and the Group's other operating platforms are in a position to write increased volumes of business as a result of the acquisition. The addition of Wellington's established US-based operations significantly advances the development of Catlin US. The combination of the two companies' books of business broadens the Group's already diversified risk portfolio. Catlin's staff will be strengthened by the addition of a group of talented employees. The acquisition is now expected to be earnings accretive in 2007, and synergies are expected to increase earnings substantially in 2008 and future years.

Chief Executive's Review
“The acquisition of Wellington strengthens Catlin and provides a platform for continued profitable growth. The acquisition is expected to double Catlin's gross premiums in a favourable underwriting environment and has significantly increased the Group's investment portfolio and stockholders' equity. Improved market positioning arising from the combination of the complementary underwriting portfolios, organic growth plans and increasing levels of intra-group reinsurance should enable all four Catlin operating platforms to increase their flow of profitable business.

Significantly, structural aspects of the acquisition have created embedded growth that the Group will realise over the next several years. Previously, Wellington owned only approximately two-thirds of the capacity of its Lloyd's Syndicate 2020, acting solely as agent for the third parties who supplied the remaining capacity. Concurrent with the acquisition and through the cessation of Syndicate 2020, Catlin in effect removed the third-party capacity and combined the Wellington and Catlin Syndicates. As a result, there will be an uplift in 2007 in the amount of business retained by the Group. There will be a further uplift after 2008, when the quota share reinsurance provided by some of Wellington's former third-party capacity providers expires.

Catlin achieved an excellent underwriting performance in 2006. Whilst 2005 saw a record level of catastrophe losses including Hurricanes Katrina, Rita and Wilma, 2006 was a benign year for natural catastrophes. Average weighted premium rates for Catlin's catastrophe exposed business increased by 31 per cent during the year, whilst rates for uncorrelated business decreased by 3 percent. Overall, average weighted premium rates across Catlin's risk portfolio increased by 6 per cent. Rate adequacy was strong in the vast majority of business classes we write.

For 2007, we expect premium rates for catastrophe exposed business to be broadly neutral following the large increases in 2006, although catastrophe rates will greatly depend on catastrophe loss experience during the year. Rates for non-catastrophe exposed business will remain under pressure, but margins are expected to remain good across the portfolio.”

Underwriting Review (Catlin As Reported)
Any discussion of Catlin's underwriting performance in 2006 must first look back to 2005, the worst year for natural catastrophe losses on record. The global insurance industry's aggregate natural catastrophe losses - including losses from Hurricanes Katrina, Rita and Wilma - exceeded US$100 billion in 2005. The 2005 loss experience followed what had also been a record year for natural catastrophe losses in 2004.

Rates for catastrophe exposed coverages - both direct and reinsurance – rose significantly during 2006. Weighted average premium rates for catastrophe exposed classes of business underwritten by Catlin rose 31 per cent during 2006, compared with a 3 per cent decrease in weighted average premium rates for non-catastrophe exposed classes. Overall, weighted average premium rates across Catlin's risk portfolio increased by 6 per cent in 2006 (2005: 1 per cent decrease). Rate adequacy was strong in the vast majority of the classes of business that Catlin underwrites.

This strong rate environment and the relatively benign catastrophe experience during 2006 can be seen in the Group's loss ratio of 51.4 per cent (2005: 71.1 per cent).

It is unknown whether the low frequency and severity of catastrophe losses in 2006 was an aberration or represents a return to more normal loss levels compared with the previous two years. However, Catlin is taking a cautious view and managing its risk portfolio on the basis that catastrophe losses in future years could again equal or exceed the levels seen in 2004 and 2005.

Whilst gross premiums written for catastrophe exposed classes of business increased in 2006 because of the strong rating environment, the Group's aggregate catastrophe exposure was reduced. Throughout 2006, Catlin reduced its exposure to catastrophe risk, so that if loss experience in 2006 had been similar to the previous year's, the company's ROE would have been significantly higher than was achieved in 2005. Catastrophe risk was reduced through a combination of increased attachment points, reductions in the maximum limits offered and smaller line sizes for certain risks.

Catlin maintains that this cautious strategy is the correct one. Whilst the Group could have written a significantly greater volume of catastrophe business in 2006 - and would have made a greater profit had it done so because of the benign conditions - the potential downside was simply too great for Catlin to accept. This underwriting strategy limits both the upside and downside risk presented by catastrophe business, which we consider a prudent course of action.

In addition to reducing our aggregate exposure to catastrophe risk, Catlin continued to seek additional streams of non-catastrophe business to balance its portfolio. The Catlin Syndicate began writing three new classes of business in 2006: US general liability insurance, international casualty treaty reinsurance and crisis management, which comprises product recall and kidnap & ransom insurance. The development of Catlin US, which generally writes non-catastrophe exposed classes of business, accelerated in 2006. Catlin Bermuda expanded its political risk and terrorism portfolio. We increased the amount of business written through our international offices and opened new offices in Hong Kong and Calgary in 2006 and in Paris, Barcelona, Zurich and Innsbruck in early 2007.

2007 outlook
Rates for catastrophe exposed business throughout 2007 will depend greatly on catastrophe experience during the year. Average weighted premium rates for catastrophe exposed business renewing in January 2007 increased by 5 per cent. 

For other classes of business we are expecting modest rate reductions across the portfolio during 2007. Average weighted premium rates for non-catastrophe business decreased by 3 per cent in January 2007. Overall, average weighted premium rates for all classes of business increased by 1 per cent in January 2007.

The acquisition of Wellington substantially strengthens Catlin's underwriting operations. The two companies underwrote complementary portfolios, and the overlap of business written is less than was initially anticipated. Catlin will benefit from greater risk diversification and an increase in the strength and depth of underwriting teams.

Income tax expense
Catlin's income tax expense increased 108 per cent to US$16.6 million (2005: US$8.0 million), whilst the effective tax rate has fallen to 6.0 per cent (2005: 28.9 per cent).

Payment to Lloyd's
Wellington has agreed, without admission of wrongdoing or liability, to pay Lloyd's £16,071 [million] to resolve an inquiry commenced by Lloyd's into the conduct of Wellington Underwriting Agencies Limited and Wellington (Five) Limited in the Lloyd's capacity auctions held during September 2006. The amount equates approximately to the difference, in aggregate, between the price received by sellers of Syndicate 2020 capacity in the auctions and the amount they would have received if they had not sold in the auction but had accepted the Syndicate cessation compensation offer of 50 pence per £1.00 of capacity. It is anticipated that the payment will be made before the end of the first quarter 2007.

2005 hurricanes
The table below shows the Group's estimated ultimate loss as at 31 December 2006, showing separately the amounts assumed in 2006 as part of the acquisition of Wellington described in Note 3.

Extract ends.