REG - Catlin Group Limited - Final Results <Origin Href="QuoteRef">CGL.L</Origin> - Part 3

CastelnauAnnouncement

10/02/2015 07:01

- Part 3: For the preceding part double click  ID:nRSJ4677Eb 

was 1.2 years (2013: 1.1 years) or US$1.1m in DV01
(2013: US$1.0m). The Group continues to remain short of the liability benchmark in the expectation that interest rates will
rise. 
 
The yield to maturity on the fixed income portfolio was 1.4 per cent at 31 December 2014 (2013: 1.5 per cent). 
 
Investment strategy 
 
The Group's investment portfolio at 31 December 2014 reflects the investment strategy that was initiated during 2010. The
objective of the investment function is to create economic value for the Group whilst managing earnings risk and
maintaining appropriate liquidity levels to meet claims and expenses. The investment strategy operates within a
comprehensive Market Risk Framework that is based on capital, liquidity and risk-adjusted returns and which is
independently overseen by Catlin's Enterprise 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 mainly AAA-rated short-duration asset-backed securities. The core portfolio is aligned with
the profile of the Group's liabilities and managed by the in-house team and a select group of external managers. 
 
The Group continues to actively manage the in-house special situations portfolio together with a select and limited number
of complementary external tactical mandates. The Group continues to acquire private equity investments with a longer-term
horizon which capture illiquidity premium and benefit from market dislocations. 
 
The Group uses overlays to manage portfolio and macro-economic risks efficiently.  As at 31 December 2014, the Group had in
place options which provide economic risk protection in the event of a significant movement in interest rates and which
provide protection against significant levels of credit spread widening and against a material fall in equity markets. The
overlay positions are reviewed and adjusted to manage the overall risk position of the investment portfolio. 
 
Investment outlook 
 
Catlin's investment strategy will continue to focus on capital preservation. Geopolitical tensions, European Union and
deflationary concerns, and a slowdown in China have contributed to risk asset volatility and provide a bid for high-quality
fixed income assets. This backdrop sets a challenging outlook for 2015 with the total return on fixed maturities remaining
under pressure given the continued low-yield environment. 
 
The Group remains positioned to actively manage duration positioning and sector allocation, depending on market
developments. The Group is expected to benefit from higher rates as the economic value of the Group's liabilities would
reduce by more than the reduction in value of its fixed income investments, given the shorter asset duration. 
 
Catlin has established a strong platform to continue investing in attractive opportunities in the special situations and
private equity sector while actively managing macro-economic risks. The Group will also continue to build on its successful
relationship with a small group of third-party specialist managers in selected sectors and asset markets in accordance with
evolving risk/reward opportunities. 
 
Loss Reserve Development 
 
Catlin adopts a consistent reserving philosophy from year-to-year, 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 that follow 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 2014 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 2004 and prior accident years represent 4 per cent of the Group's net reserves at 31
December 2014. 
 
A summary of the Group's net reserves is shown in the table below. 
 
Table 1: Summary of Catlin Group net reserves at 31 December 2014 (US$m) 
 
 Accident Year        Catlin net reserves  Legacy Wellington net reserves  Total net reserves  % of total     
                                                                                               net reserves   
 2004 and prior       88                   127                             215                 4%             
 2005                 25                   37                              62                  1%             
 2006                 33                   47                              80                  2%             
 2007                 128                  8                               136                 3%             
 2008                 134                  1                               135                 3%             
 2009                 433                                                  433                 8%             
 2010                 391                                                  391                 7%             
 2011                 461                                                  461                 9%             
 2012                 659                                                  659                 12%            
 2013                 1,047                                                1,047               20%            
 2014                 1,604                                                1,604               30%            
 Sub-total            5,003                220                             5,223               99%            
 Other net reserves1                                                       31                  1%             
 Total net reserves                                                        5,254               100%           
 
 
1    Other net reserves include unallocated claims handling expenses, potential reinsurance failure and disputes, other
outwards reinsurance and Life business 
 
Commentary on development tables 
 
·      Non-major events: The 2010 and 2011 accident years have improved due to changes in reserving assumptions in the
Casualty and Reinsurance product groups. The 2012 accident year has improved due to changes in reserving assumptions in the
Reinsurance product group and better than expected experience in the Marine product group. The 2013 accident year has
mainly improved due to changes in reserving assumptions and better than expected experience in the Energy and Marine
product groups. 
 
·      Major events: The deterioration on 2010 major events is driven by the New Zealand Darfield earthquake, mostly due to
updated cedant advices. The deterioration on 2012 major events is mainly driven by the deterioration on the Costa Concordia
loss. The improvement on 2013 major events is largely driven by reductions in the Oklahoma Tornado loss and Central
European Floods loss. 
 
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 development tables 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. 
 
Events included in the major events sections of loss development triangles 
 
 Accident year  Event                                                                          
 2002 & prior   World Trade Centre/US Terrorism 9/11                                           
 2004           Hurricane Charley                                                              
                Hurricane Frances                                                              
                Hurricane Ivan                                                                 
                Hurricane Jeanne                                                               
 2005           Hurricane Katrina                                                              
                Hurricane Rita                                                                 
                Hurricane Wilma                                                                
 2008           Hurricane Ike                                                                  
 2010           Chilean Earthquake                                                             
                Deepwater HorizonNew Zealand EarthquakeAustralian Floods, Central Queensland   
 2011           Australian Floods, Brisbane                                                    
                New Zealand Earthquake                                                         
                Japanese Earthquake                                                            
                Tuscaloosa Tornadoes                                                           
                Joplin Tornadoes                                                               
                New Zealand Summer Earthquake                                                  
                Hurricane Irene                                                                
                Danish Cloudburst                                                              
                Thai Floods                                                                    
 2012           Costa Concordia                                                                
                Windstorm Sandy                                                                
 2013           Central European Floods                                                        
                Calgary Floods                                                                 
                German Hailstorms                                                              
                Other Catastrophe Events Less Than US$25 Million                               
 
 
Development tables: Estimated ultimate net losses (US$m) 
 
                                                                                                                         Accident year  
                                                 Wellington accident periods 2006 and prior  2004 & prior  2005   2006   2007           2008   2009   2010   2011   2012   2013   2014   Total   
 Net premiums earned                                                                                       1,190  1,333  2,715          2,531  2,895  3,231  3,612  3,604  3,948  4,160          
                                                                                                                                                                                                 
 Net ultimate excluding major events                                                                                                                                
 Initial estimate1                               5,881                                       2,492         580    626    1,359          1,521  1,784  1,651  1,802  1,783  2,020  2,248          
 One year later                                  5,857                                       2,429         527    585    1,412          1,496  1,753  1,630  1,818  1,758  2,005                 
 Two years later                                 5,765                                       2,392         486    570    1,395          1,491  1,738  1,576  1,777  1,713                        
 Three years later                               5,755                                       2,406         464    555    1,384          1,470  1,702  1,515  1,743                               
 Four years later                                5,659                                       2,399         459    548    1,389          1,459  1,653  1,467                                      
 Five years later                                5,650                                       2,403         452    549    1,382          1,454  1,648                                             
 Six years later                                 5,588                                       2,410         455    547    1,389          1,440                                                    
 Seven years later                               5,556                                       2,385         451    543    1,384                                                                   
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