REG - Catlin Group Limited - Final Results <Origin Href="QuoteRef">CGL.L</Origin> - Part 4

CastelnauAnnouncement

10/02/2015 07:01

- Part 4: For the preceding part double click  ID:nRSJ4677Ec 

purchase. 
 
Net investment return includes interest income adjusted for amortisation of premiums and discounts and is net of investment
management and custodian fees. Interest income is recognised when earned. Premiums and discounts are amortised or accreted
over the lives of the related securities as an adjustment to yield using the effective-interest method and amortisation is
recorded in current period income. For mortgage-backed securities and any other holdings for which there is a prepayment
risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change
in effective yields and maturities are recognised prospectively. 
 
All gains or losses on fixed maturities and short-term investments are included in net investment return in the
Consolidated Income Statements. 
 
Other invested assets 
 
The Group's other invested assets comprise investments in funds, equity securities and loan instruments. Equity investments
over which the Group exercises significant influence are carried at cost adjusted for the Group's share of earnings or
losses and distributions. The remainder of the Group's other invested assets are carried at fair value. All income, gains
and losses on other invested assets are included within net investment return in the Consolidated Income Statements. 
 
Derivatives 
 
The Group recognises derivative financial instruments as either assets or liabilities measured at fair value. Gains and
losses resulting from changes in fair value are included in net income in the Consolidated Income Statements. None of the
derivatives used are designated as accounting hedges. 
 
The fair values of equity contracts, interest rate contracts and credit default contracts described in Note 5 are based on
prices provided by independent pricing services. Any equity contracts at the balance sheet date are included in other
invested assets in the Consolidated Balance Sheets. Any open interest rate contracts and credit default contracts are
included in fixed maturity investments. Gains and losses resulting from change in fair value are included in net investment
return in the Consolidated Income Statements. 
 
The fair values of foreign exchange derivatives described in Note 5 are based on prices provided by counterparties. Gains
and losses on foreign exchange derivatives are included in net gains/(losses) on foreign currency in the Consolidated
Income Statements. 
 
Cash and cash equivalents 
 
Cash equivalents include all instruments with original maturities of 90 days or less. 
 
Securities lending 
 
The Group participates in securities lending arrangements whereby specific securities are loaned to other institutions,
primarily banks and brokerage firms, for short periods of time. Under the terms of the securities lending agreements, the
loaned securities remain under the Group's control and therefore remain on the Group's balance sheets. Collateral in the
form of cash, government securities and letters of credit is required and is monitored and maintained by the lending agent.
The Group receives interest income on the invested collateral, which is included in net investment return in the
Consolidated Income Statements. 
 
Premiums 
 
Premiums are recorded as written at the inception of each policy and are earned over the policy period. Accordingly,
unearned premiums represent the portion of premiums written which is applicable to the unexpired risk portion of the
policies in force. 
 
Reinsurance premiums assumed are recorded at the inception of the policy and are estimated based on information provided by
ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded
in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts. 
 
Reinstatement premiums are recognised at the time an applicable insured event occurs and are fully earned when recognised. 
 
Policy acquisition costs 
 
Policy acquisition costs are those costs, consisting primarily of commissions and premium taxes, which vary with and are
primarily related to the production of premiums. Policy acquisition costs are deferred and amortised over the period in
which the related premiums are earned. 
 
To the extent that future policy premiums, including anticipation of interest income, are not adequate to recover all
deferred policy acquisition costs ('DPAC') and related losses and loss expenses, a premium deficiency is recognised
immediately by a charge to net income. If the premium deficiency is greater than unamortised DPAC, a liability will be
accrued for the excess deficiency. 
 
Reserves for losses and loss expenses 
 
A liability is established for unpaid losses and loss expenses when insured events occur. The liability is based on the
expected ultimate cost of settling the claims. The reserve for losses and loss expenses includes: (1) case reserves for
known but unpaid claims as at the balance sheet date; (2) incurred but not reported ('IBNR') reserves for claims where the
insured event has occurred but has not been reported to the Group as at the balance sheet date (and for additional
development on reported claims in instances where the case reserve is viewed to be potentially insufficient); and (3) loss
adjustment expense reserves for the expected handling costs of settling the claims. 
 
Reserves for losses and loss expenses are established based on amounts reported from insureds or ceding companies and
according to generally accepted actuarial principles. Reserves are based on a number of factors, including experience
derived from historical claim payments and actuarial assumptions to arrive at loss development factors. Such assumptions
and other factors include trends, the incidence of incurred claims and the extent to which all claims have been reported.
The process used in establishing reserves cannot be exact, particularly for liability and catastrophe-related coverages,
since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and
damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and
updated, and any adjustments required are reflected in net income in the current year in the Consolidated Income
Statements. 
 
Reinsurance 
 
In the ordinary course of business, the Group's subsidiaries cede premiums to other insurance companies. These arrangements
allow for greater diversification of business and minimise the net loss potential arising from large risks. Ceded
reinsurance contracts do not relieve the Group of its obligations to its insureds. 
 
Reinsurance premiums ceded and commissions thereon are recognised over the period that the reinsurance coverage is
provided. Reinsurers' share of unearned premiums represents the portion of premiums ceded to reinsurers applicable to the
unexpired terms of the reinsurance contracts in force. Reinstatement premiums payable are recognised at the time an
applicable insured event occurs and are fully expensed when recognised. 
 
Reinsurance recoverables include the balances due from reinsurance companies for unpaid and paid losses and loss expenses
that will be recovered from reinsurers, based on contracts in force. A reserve for uncollectible reinsurance is determined
based upon a review of the financial condition of the reinsurers and an assessment of other available information. 
 
Retroactive reinsurance 
 
Catlin has purchased an Adverse Development Cover ('ADC') that, subject to limits, provided protection during 2014 against
the deterioration of loss reserves relating to the Group's 2011 and prior underwriting years. This coverage is accounted
for as retroactive reinsurance, which is reinsurance where the cedant is reimbursed for liabilities incurred as a result of
past insurable events. Net costs of the ADC are recognised immediately as reinsurance premiums ceded in the Consolidated
Income Statements. Any net gains that arise as a result of subsequent covered adverse development are deferred and
amortised into income over the settlement period of the recoveries under the relevant contract. 
 
Intangible assets and goodwill 
 
The Group's intangible assets relate to syndicate capacity and US insurance licenses (as admitted and eligible surplus
lines insurers). Intangible assets are valued at their fair value at the time of acquisition. 
 
Purchased syndicate capacity and admitted licenses are considered to have an indefinite life and as such are subject to
annual impairment testing. 
 
The Group evaluates the recoverability of its intangible assets whenever changes in circumstances indicate that an
intangible asset may not be recoverable. If it is determined that an impairment exists, the excess of the unamortised
balance over the fair value of the intangible asset is recognised as a charge to net income in the Consolidated Income
Statements. 
 
Goodwill represents the excess of purchase price over the net fair value of identifiable assets acquired and liabilities
assumed in a business combination. Goodwill is deemed to have an indefinite life and is not amortised, but rather tested at
least annually for impairment. Impairment losses are recognised in net income in the Consolidated Income Statements. 
 
The impairment tests involve an initial assessment of qualitative factors. If this assessment indicates that further
impairment testing is necessary, the fair values of reporting units and intangible assets are evaluated and compared to the
relevant carrying values. The measurement of fair values is based on an evaluation of a number of factors, including ranges
of future discounted earnings and recent market transactions. Certain key assumptions considered include forecasted trends
in operating returns and cost of capital. 
 
Other assets 
 
Other assets include prepaid items, property and equipment, income tax recoverable, and securities lending collateral. 
 
Comprehensive income/(loss) 
 
Comprehensive income/(loss) represents all changes in equity that result from recognised transactions and other economic
events during the year. The Group's other comprehensive income/(loss) primarily comprises foreign currency translation
adjustments. 
 
Foreign currency 
 
Foreign currency translation 
 
The reporting currency of the Group is US dollars. The financial statements of each of the Group's entities are initially
measured using the entity's functional currency, which is determined based on its operating environment and underlying cash
flows. For entities with a functional currency other than US dollars, foreign currency assets and liabilities are
translated into US dollars using period-end rates of exchange, while Income Statements are translated at rates of exchange
prevailing during the period. The resulting translation differences are recorded as a separate component of accumulated
other comprehensive income/(loss) within stockholders' equity. 
 
Foreign currency transactions 
 
Monetary assets and liabilities denominated in currencies other than the functional currency are re-valued at period-end
rates of exchange, with the resulting gains and losses included in net income in the Consolidated Income Statements. 
 
Income taxes 
 
Income taxes have been provided for those operations that are subject to income taxes. Deferred tax assets and liabilities
result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis
of the Group's assets and liabilities. Such temporary differences are primarily due to the recognition of untaxed profits
and intangible assets arising from the acquisition of Wellington Underwriting plc ('Wellington') in December 2006. The
effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes
the enactment date. 
 
A valuation allowance against deferred tax assets is recorded if it is more likely than not that all or some portion of the
benefits related to deferred tax assets will not be realised. 
 
Stock compensation 
 
The fair value of awards under stock-based compensation arrangements is calculated on the grant date based on conditions in
effect on that date, most notably the share price and the exchange rate. This value is recognised in the Consolidated
Income Statements on a straight-line basis over the vesting period. The calculation is updated on a regular basis to
reflect revised vesting expectations and actual experience. 
 
Treasury stock 
 
Treasury stock comprises common shares in the Company purchased by and held within the Group. These shares are recognised
at cost in the Consolidated Balance Sheets and are shown as a deduction from stockholders' equity. 
 
Non-controlling interest in preferred stock 
 
Non-cumulative perpetual preferred stock issued by a consolidated subsidiary of the Group is shown within stockholders'
equity in the Consolidated Balance Sheets as non-controlling interest in preferred stock. They are valued based on the
proceeds received when issued, net of issuance costs. The non-controlling preferred stock is described further in Note 12. 
 
Pensions 
 
The Group operates defined contribution pension schemes for eligible employees, the costs of which are expensed as
incurred. The Group also sponsors a defined benefit pension scheme which was closed to new members in 1993. Any surplus or
deficit on the scheme is carried as an asset or liability in the Consolidated Balance Sheets. 
 
New accounting pronouncements 
 
In May 2014, the Financial Accounting Standards Board ('FASB') issued Accounting Standards Update ('ASU') No. 2014-09,
Revenue from Contracts with Customers, providing a new model for revenue recognition for most companies. The accounting for
insurance contracts, investment income and topics covered by other GAAP are not amended by this guidance. The update will
be effective for the Group from the beginning of 2017. Early application is not permitted. Under the new model an entity
should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires
additional disclosures about revenue. Catlin is currently evaluating the impact of this guidance on the Company's financial
position and results of operations. 
 
In June 2014 the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures.
Accounting changes for repurchase-to-maturity transactions and repurchase financings along with disclosures for
transactions accounted for as a sale are effective for the Group from the beginning of 2015. Disclosure requirements for
repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured
borrowings are first required for the Group in the 2015 year-end financial statements. Early application is not permitted.
Under the new requirements, repurchase-to-maturity transactions will be accounted for as secured borrowings, as will
repurchase financing arrangements. The update also requires enhanced disclosures for these transactions as well as for
repurchase agreements and securities lending activities. Catlin is currently evaluating the impact of this guidance and
does not expect a significant impact on the Company's financial position and results of operations. 
 
3   Segmental information 
 
The Group determines its reportable segments by underwriting hubs, consistent with the manner in which results are reviewed
by management. 
 
The four reportable segments are: 
 
·    London, which comprises direct insurance and reinsurance business originating in the United Kingdom and in the London
wholesale market; 
 
·    Bermuda, which primarily underwrites reinsurance business; 
 
·    US, which underwrites direct insurance and reinsurance business originating in the United States and Latin America;
and 
 
·    International, which comprises the Group's Asia-Pacific, Europe and Canada underwriting hubs, which provide a full
complement of insurance and reinsurance services for their markets. 
 
At 31 December 2014 there were four significant intra-Group reinsurance contracts in place: a 40 per cent quota share,
which cedes Catlin Syndicate 2003 at Lloyd's ('Catlin Syndicate') risk to Catlin Re Schweiz AG ('Catlin Re Switzerland'); a
75 per cent quota share contract, which cedes Catlin Insurance Company (UK) Limited ('Catlin UK') risk to Catlin Re
Switzerland; a Whole Account Stop Loss contract, which cedes 5.5 per cent of premiums and up to 20 per cent of losses above
a net loss ratio of 86 per cent from the Catlin Syndicate to Catlin Re Switzerland; and a 75 per cent quota share contract,
which cedes Catlin Inc. ('Catlin US') risk to Catlin Re Switzerland. Further quota share contracts were in place that ceded
risk from 2010 and prior underwriting years to Catlin Insurance Company Ltd ('Catlin Bermuda'). The effects of each of
these reinsurance contracts are excluded from segmental revenue and results, as this is the basis upon which the
performance of each segment is assessed. 
 
Net underwriting contribution by underwriting hub for the year ended 31 December 2014 is as follows: 
 
 (US dollars in millions)       London  Bermuda  US      International  Total    
 Gross premiums written         $2,763  $577     $1,374  $1,252         $5,966   
                                                                                 
 Net premiums earned            1,895   449      937     879            4,160    
 Losses and loss expenses       (905)   (154)    (596)   (528)          (2,183)  
 Policy acquisition costs       (463)   (107)    (212)   (204)          (986)    
 Net underwriting contribution  $527    $188     $129    $147           $991     
 
 
Net underwriting contribution by underwriting hub for the year ended 31 December 2013 is as follows: 
 
 (US dollars in millions)       London  Bermuda  US      International  Total    
 Gross premiums written         $2,474  $577     $1,213  $1,045         $5,309   
                                                                                 
 Net premiums earned            1,832   486      858     772            3,948    
 Losses and loss expenses       (880)   (191)    (512)   (480)          (2,063)  
 Policy acquisition costs       (429)   (112)    (178)   (163)          (882)    
 Net underwriting contribution  $523    $183     $168    $129           $1,003   
 
 
The component