REG - Catlin Group Limited - Final Results <Origin Href="QuoteRef">CGL.L</Origin> - Part 5

CastelnauAnnouncement

10/02/2015 07:01

- Part 5: For the preceding part double click  ID:nRSJ4677Ed 

positions  (5)   1      
 Rate change                                                          -     (20)   
 Adjustment to taxable income                                         17    -      
 Expense/(benefit) for income taxes                                   $26   $(4)   
 
 
The components of the Group's net deferred tax liability as at 31 December 2014 and 2013 are as follows: 
 
 (US dollars in millions)                           2014    2013    
 Deferred tax assets:                                               
 Net operating loss carry forwards                  $17     $40     
 Foreign tax credits                                17      65      
 Capital allowances                                 12      11      
 Other timing differences                           72      47      
 Valuation allowance                                (69)    (65)    
 Total deferred tax assets                          $49     $98     
 Deferred tax liabilities:                                          
 Untaxed profits                                    (15)    (146)   
 Intangible assets arising on business combination  (73)    (73)    
 Syndicate capacity                                 (20)    (19)    
 Total deferred tax liabilities                     $(108)  $(238)  
 Net deferred tax liability                         $(59)   $(140)  
 
 
As at 31 December 2014 the Group had operating tax losses carried forward of $120 million (2013: $186 million) which are
available to offset future taxable income. The potential deferred tax asset on these losses is $17 million. However, the
Group has recognised a full valuation allowance of $13 million against the losses carried forward in the UK and Luxembourg
and a partial valuation allowance against those losses in Switzerland. Consequently, the Group has only recognised a net
deferred tax asset of $4 million in respect of operating losses carried forward. The remaining component of the total
valuation allowance of $69 million is made up of $56 million in respect of other timing differences arising in the US
entities. 
 
Uncertain tax positions 
 
As at 31 December 2014 the liability amount of uncertain tax benefits was $7 million (2013: $15 million). 
 
A reconciliation of the beginning and ending amount of unrecognised tax benefits arising from uncertain tax positions is as
follows: 
 
 (US dollars in millions)                          2014  2013  
 Unrecognised tax benefits balance at 1 January    $15   $15   
 Gross decrease in tax positions of prior years    (8)   -     
 Unrecognised tax benefits balance at 31 December  $7    $15   
 
 
The Group does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts.
The Group accrues interest and penalties (if applicable) as income tax expenses in the consolidated financial statements.
The Group did not pay or accrue any interest or penalties in 2014 or 2013 relating to uncertain tax positions. 
 
The following table lists the open tax years that are still subject to examinations by local tax authorities in major tax
jurisdictions: 
 
 Major tax jurisdiction  Years      
 United Kingdom          2012-2014  
 United States           2011-2014  
 Switzerland             2012-2014  
 
 
12 Stockholders' equity 
 
The following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2014 and
2013: 
 
                                                                     2014         2013         
 Common stock, par value $0.01                                                                 
 Authorised                                                          500,000,000  500,000,000  
                                                                                               
 Issued                                                              362,559,871  362,053,537  
 Stock held by Employee Benefit Trust                                (3,504,016)  (4,286,374)  
 Outstanding                                                         359,055,855  357,767,163  
                                                                                               
 Preferred stock issued by consolidated subsidiary, par value $0.01                            
 Authorised, issued and outstanding                                  600,000      600,000      
 
 
The following table outlines the changes in common stock issued during 2014 and 2013: 
 
                            2014         2013         
 Balance, 1 January         362,053,537  361,824,004  
 Exercise of stock options  506,334      229,533      
 Balance, 31 December       362,559,871  362,053,537  
 
 
Treasury stock 
 
Through an Employee Benefit Trust ('EBT'), the Group holds shares that will be used to satisfy Performance Share Plan
('PSP') and/or other employee share plan awards if and when they vest and become exercisable. During 2014, the Group
through the EBT purchased 4,661,154 of the Group's shares at an average price of $8.80 (£5.27) per unit. The total amount
paid for treasury stock of $42 million is shown as a deduction to stockholders' equity. The cumulative cost of shares held
by the EBT of $39 million is shown as a deduction to stockholders' equity. 
 
Non-controlling preferred stock 
 
Catlin Bermuda is a consolidated subsidiary whose common stock is wholly owned by the Company.  In 2007, Catlin Bermuda
issued 600,000 non-cumulative perpetual preferred shares, par value of $0.01 per unit, with liquidation preference of
$1,000 per unit, plus declared and unpaid dividends. Dividends at a rate of 7.249 per cent on the liquidation preference
are payable semi-annually on 19 January and 19 July in arrears as and when declared by the Board of Directors, commencing
on 19 July 2007 up to but not including 19 January 2017. Thereafter, if the stock has not yet been redeemed, dividends will
be payable quarterly at a rate equal to 2.975 per cent plus the three-month Libor rate of the liquidation preference.
Catlin Bermuda received proceeds of approximately $590 million, net of issuance costs. The non-controlling preferred shares
do not have a maturity date and are not convertible into or exchangeable into any of Catlin Bermuda's or the Group's other
securities. 
 
Dividends 
 
Dividends on common stock 
 
On 20 March 2014 the Group paid a final dividend on the common stock relating to the 2013 financial year of 21.0 pence per
share (34.3 cents per share) to stockholders of record at the close of business on 21 February 2014. The total dividend
paid for the 2013 financial year was 31.0 pence per share (49.8 cents per share). 
 
On 22 September 2014, the Group paid an interim dividend relating to the 2014 financial year of 10.5 pence per share (17.7
cents per share) to stockholders of record on 22 August 2014. 
 
Non-controlling preferred stock dividend 
 
On both 19 January and 19 July, Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the
non-cumulative perpetual non-controlling preferred stock. 
 
13 Employee stock compensation schemes 
 
The Group has several employee schemes in place, of which the most significant are the Performance Share Plan ('PSP') and
the Incentive Share Plan ('ISP'). From 2014, awards are made under the PSP adopted in 2013. This replaces the previous PSP,
adopted in 2004, under which awards were made in 2013 and prior years.  The first ISP awards were made in 2014. In
addition, the Group also has a Deferred Bonus Share Plan and three Employee Share Plans in place. These financial
statements include the total cost of stock compensation for all plans, calculated using the fair value method of accounting
for stock-based employee compensation. 
 
The total amount expensed to income in respect of all plans in the year ended 31 December 2014 was $60 million (2013: $50
million), included in administrative and other expenses. 
 
Performance Share Plan 
 
In February 2014, Standard Awards comprising a total of 3,896,040 options with $nil exercise price and 1,479,398 non-vested
shares (total of 5,375,438 securities) were awarded to Group employees under the PSP. In August 2014, a further 60,085
options with $nil exercise price and 67,321 non-vested shares (total of 127,406 securities) were awarded, resulting in a
total of 5,502,844 securities granted to Group employees under the PSP in 2014. Up to half of the securities will vest in
2017 and up to half will vest in 2018, subject to certain performance conditions. Additional Awards comprising 183,705
options with $nil exercise price were also granted. Up to half of these securities will vest in 2017 and up to half will
vest in 2018, subject to certain market-based conditions. 
 
These securities have been treated as non-vested shares and as such have been measured at their fair value on the grant
date as if they were fully vested and issued and assuming an annual attrition rate of 0-6 per cent depending on the award.
This value is charged to the Consolidated Income Statements over the vesting period, with a corresponding adjustment to
equity. The charge is revised at each balance sheet date to take account of actual achievement of the performance condition
that governs the level of vesting and any changes that may be required to the attrition assumption. The total amount of
expense relating to PSP for the year ended 31 December 2014 was $53 million (2013: $50 million). 
 
Incentive Share Plan 
 
In February 2014 a total of 2,168,384 options with $nil exercise price and 869,670 non-vested shares (total of 3,038,054
securities) were awarded to Group employees under the Group's Incentive Share Plan ('ISP'). In August 2014, a further
56,319 options with $nil exercise price and 5,722 non-vested shares (total of 62,041 securities) were awarded, resulting in
a total of 3,100,095 securities granted to Group employees under the ISP in 2014. Half of the securities will vest in 2017
and half will vest in 2018, subject to continued service. 
 
These securities have been treated as non-vested shares and as such have been measured at their fair value on the grant
date as if they were fully vested and issued and assuming an annual attrition rate of 5 per cent. This value is charged to
the Consolidated Income Statements over the vesting period, with a corresponding adjustment to equity. The charge is
revised at each balance sheet date to take account of any changes that may be required to the attrition assumption. The
total amount of expense relating to ISP for the year ended 31 December 2014 was $7 million (2013: $nil). 
 
The table below shows the PSP and ISP awards as at 31 December 2014 and activity during 2014. 
 
                                PSP Standard Awards  PSP Additional Awards        ISP Awards        
                                Number of            Weighted average fair value  Number of awards  Weighted average fair value  Number      Weighted average fair value  
                                awards                                                                                           of awards                                
 Outstanding, 1 January 2014    35,645,656           $9.64                        -                 -                            -           -                            
 Granted during year            5,502,844            $9.18                        183,705           $5.85                        3,100,095   $9.18                        
 Forfeited during year          (6,757,674)          $8.79                        -                 -                            (161,583)   $8.79                        
 Exercised during year          (3,948,209)          $8.79                        -                 -                            -           -                            
 Outstanding, 31 December 2014  30,442,617           $10.47                       183,705           $7.97                        2,938,512   $10.47                       
 Exercisable, end of year       1,208,094            $10.47                       -                 -                            -           -                            
 
 
The total fair value of PSP Standard Awards vested during the year was $35 million (2013: $42 million). 
 
The following table provides further information on the PSP and ISP securities as at 31 December 2014. 
 
 (US dollars in millions)                          PSP Standard Awards  PSP Additional Awards  ISP Awards  
 Weighted average remaining contractual life       8 years              9 years                9 years     
 Maximum contractual term of equity share options  9 years              9 years                9 years     
 Weighted average period of recognition            1 years              3 years                3 years     
 Future compensation relating to unvested awards   $54                  $0.2                   $17         
 
 
Under the terms of the Deferred Bonus Share Plan, any bonus award exceeding 130 per cent of base salary is deferred into
shares. In March 2014, conditional rights to acquire 113,958 shares were awarded on this basis. These are eligible to vest
in equal proportions in 2017, 2018 and 2019. 
 
The Group also has three All-Employee Share Plans in place. The expense related to the All-Employee Share Plans is
considered to be insignificant. 
 
14 Earnings per share 
 
Basic earnings per share are calculated by dividing the earnings attributable to common stockholders by the weighted
average number of common shares issued and outstanding during the year. 
 
Diluted earnings per share is calculated by dividing the earnings attributable to common stockholders by the weighted
average number of common shares issued and outstanding, adjusted to assume conversion of all dilutive potential common
shares. The Company has the following potentially dilutive instruments outstanding during the years presented: 
 
(i)         PSP; 
 
(ii)         ISP; 
 
(iii)        Deferred Bonus Shares; and 
 
(iv)        All-Employee Share Plans. 
 
Income to common stockholders is arrived at after deducting non-controlling preferred stock dividends of $44 million (2013:
$44 million). 
 
Reconciliations of the number of shares used in the calculations as at 31 December 2014 and 2013 are set out below. 
 
                                                         2014         2013         
 Weighted average number of shares                       358,487,807  355,350,786  
 Dilution effect of stock options and non-vested shares  17,653,686   8,461,337    
 Weighted average number of shares on a diluted basis    376,141,493  363,812,123  
                                                                                   
 Earnings per common share                                                         
 Basic                                                   $1.17        $1.11        
 Diluted                                                 $1.11        $1.08        
 
 
With effect from 2014, securities awarded under the PSP were included in the computation of diluted earnings per share to
the extent that the full term performance conditions necessary for these securities to vest were met as at 31 December. The
2013 comparatives have been revised on this basis. 
 
15         Other comprehensive income/(loss) 
 
The following table details the individual components of other comprehensive income/(loss) for 2014 and 2013: 
 
 (US dollars in millions)            Amount       Tax (expense)/benefit  Amount      
                                     before tax                          after tax   
 2014                                                                                
 Cumulative translation adjustments  $(41)        $(3)                   $(44)       
 Defined benefit pension plan        1            -                      1           
 Other comprehensive income/(loss)   $(40)        $(3)                   $(43)       
 2013                                                                                
 Cumulative translation adjustments  $(14)        $8                     $(6)        
 Defined benefit pension plan        -            -                      -           
 Other comprehensive income/(loss)   $(14)        $8                     $(6)        
                                                                                           
 
 
The following table details the components of accumulated other comprehensive loss as at 31 December: 
 
 (US dollars in millions)                                  2014    2013    
 Cumulative translation adjustments                        $(247)  $(203)  
 Funded status of defined benefit pension plan adjustment  4       3       
 Accumulated other comprehensive loss                      $(243)  $(200)  
 
 
16 Pension commitments 
 
The Group operates various pension schemes for employees in the different countries of operation. 
 
In the UK the Group operates defined contribution schemes for certain directors and employees, which are administered by
third-party insurance companies. The pension cost for the UK scheme was $16 million for the year ended 31 December 2014
(2013: $14 million). 
 
In Bermuda the Group operates a defined contribution scheme, under which the Group contributes a specified percentage of
each employee's earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2014 (2013:
$1 million). 
 
In the US the Group has adopted a 401(k) Profit Sharing Plan qualified under the Internal Revenue Code and a Non-Qualified
Deferred Compensation Plan under which the Group contributes a specified percentage of each employee's earnings. The
pension cost for the US scheme was $6 million for the year ended 31 December 2014 (2013: $6 million). 
 
In Switzerland the Group operates a defined contribution scheme, under which the Group contributes a specified percentage
of each employee's earnings. The pension cost for the Switzerland scheme was $2 million for the year ended 31 December 2014
(2013: $2 million). 
 
In connection with the acquisition of Wellington in December 2006, the Group assumed liabilities associated with a defined
benefit pension scheme which Wellington sponsored. The scheme has been closed to new members since 1993. The current
membership consists only of pensioners and deferred members. Projected benefit obligations at 31 December 2014 were $29
million (2013: $29 million) and fair value of plan assets was $34 million (2013: $32 million). Plan assets are
substantially all invested in corporate bonds, valued using Level 2 inputs in the fair value hierarchy described in Note 6.
The pension costs for t