REG - Catlin Group Limited - Half Yearly Report <Origin Href="QuoteRef">CGL.L</Origin> - Part 2
29/10/2014 11:19
- Part 2: For the preceding part double click ID:nRSH5962Oa
other comprehensive loss (189) (235) (200)
Retained earnings 1,600 1,232 1,450
Total common stockholders' equity 3,364 2,901 3,193
Non-controlling interest in preferred stock of 590 590 590
consolidated subsidiary
Total stockholders' equity 3,954 3,491 3,783
Total liabilities and stockholders' equity $16,245 $15,046 $14,594
The accompanying notes are an integral part of the consolidated financial
statements.
Approved by the Board of Directors on 7 August 2014.
Stephen Catlin
Director
Benjamin Meuli
Director
Catlin Group Limited
Consolidated Income Statements (Unaudited)
For the six months ended 30 June 2014 and 2013
(US dollars in millions, except per share amounts)
2014 2013
Revenues
Gross premiums written $3,660 $3,299
Reinsurance premiums ceded (1,053) (862)
Net premiums written 2,607 2,437
Change in net unearned premiums (569) (524)
Net premiums earned 2,038 1,913
Net investment return 142 9
Net gains/(losses) on foreign currency 3 (12)
Other income 11 7
Total revenues 2,194 1,917
Expenses
Losses and loss expenses 1,031 1,045
Policy acquisition costs 471 427
Administrative and other expenses 366 292
Financing costs 8 8
Total expenses 1,876 1,772
Net income before income tax 318 145
Income tax expense (23) (5)
Net income 295 $140
Non-controlling preferred stock dividend (22) (22)
Net income to common stockholders $273 $118
Earnings per common share
Basic $0.76 $0.34
Diluted $0.70 $0.32
The accompanying notes are an integral part of the consolidated financial
statements.
Catlin Group Limited
Consolidated Statements of Comprehensive Income (Unaudited)
For the six months ended 30 June 2014 and 2013
(US dollars in millions)
2014 2013
Net income to common stockholders $273 $118
Other comprehensive income/(loss), net of tax
Translation adjustments 11 (41)
Total other comprehensive income/(loss) 11 (41)
Comprehensive income to common stockholders $284 $77
The accompanying notes are an integral part of the consolidated financial
statements.
Catlin Group Limited
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the six months ended 30 June 2014 and 2013
(US dollars in millions)
Common Additional Treasury Accumulated Retained Non- Total
stock paid-in stock other earnings controlling preferred stockholders'
capital comprehensive loss stock equity
Balance 1 January 2013 $4 $1,961 $(73) $(194) $1,224 $590 $3,512
Net income to common stockholders - - - - 118 - 118
Other comprehensive loss - - - (41) - - (41)
Stock compensation expense - 12 - - - - 12
Dividends - - - - (110) - (110)
Distribution of treasury stock held by Employee Benefit Trust - (31) 31 - - - -
Balance 30 June 2013 $4 $1,942 $(42) $(235) $1,232 $590 $3,491
Balance 1 January 2014 $4 $1,976 $(37) $(200) $1,450 $590 $3,783
Net income to common stockholders - - - - 273 - 273
Other comprehensive income - - - 11 - - 11
Stock compensation expense - 31 - - - - 31
Dividends - - - - (123) - (123)
Treasury stock purchased - - (21) - - - (21)
Distribution of treasury stock held in Employee Benefit Trust - (28) 28 - - - -
Balance 30 June 2014 $4 $1,979 $(30) $(189) $1,600 $590 $3,954
The accompanying notes are an integral part of the consolidated financial
statements.
Catlin Group Limited
Consolidated Statements of Cash Flows (Unaudited)
For the six months ended 30 June 2014 and 2013
(US dollars in millions)
2014 2013
Cash flows provided by operating activities
Net income $295 $140
Adjustments to reconcile net income to net cash provided by operations:
Amortisation and depreciation 12 10
Amortisation of net discounts on fixed maturities 22 24
Net losses/(gains) on investments (79) 45
Changes in operating assets and liabilities:
Reserves for losses and loss expenses 94 119
Unearned premiums 968 819
Premiums and other receivables (894) (690)
Deferred policy acquisition costs (148) (156)
Reinsurance recoverable on unpaid losses (28) (46)
Reinsurance recoverable on paid losses (38) (6)
Reinsurers' share of unearned premiums (409) (292)
Reinsurance payable 395 277
Accounts payable and other liabilities (64) 14
Deferred taxes (74) (3)
Net income tax payable 90 (1)
Other 31 (141)
Net cash flows provided by operating activities 173 113
Cash flows used in investing activities
Purchases of fixed maturities (4,434) (2,137)
Proceeds from sales of fixed maturities 3,510 1,956
Proceeds from maturities of fixed maturities 153 130
Net purchases, sales and maturities of short-term investments (20) 15
Purchases of other invested assets (340) (278)
Proceeds from the sales and redemptions of other invested assets 485 347
Net purchases and sales of property and equipment (32) (14)
Net cash flows (used in)/provided by investing activities (678) 19
The accompanying notes are an integral part of the consolidated financial
statements.
2014 2013
Cash flows used in financing activities
Dividends paid on common stock (123) (110)
Dividends paid on non-controlling preferred stock (22) (22)
Purchase of treasury stock (21) -
Net cash flows used in financing activities (166) (132)
Net decrease in cash and cash equivalents (671) -
Effect of exchange rate changes 15 (67)
Cash and cash equivalents - beginning of period 2,291 2,474
Cash and cash equivalents - end of period $1,635 $2,407
Supplemental cash flow information
Taxes paid $7 $11
Interest paid $2 $2
Cash and cash equivalents comprise the following:
Cash at bank and in hand $651 $1,174
Cash equivalents $984 $1,233
The accompanying notes are an integral part of the consolidated financial
statements.
Catlin Group Limited
Notes to the Consolidated Financial Statements (Unaudited)
For the six months ended 30 June 2014 and 2013
1 General
Basis of presentation
Catlin Group Limited ('Catlin' or the 'Company') is a holding company
incorporated on 25 June 1999 under the laws of Bermuda. Through its
subsidiaries, which together with the Company are referred to as the 'Group',
Catlin underwrites specialty classes of insurance and reinsurance on a global
basis.
The unaudited interim consolidated financial statements have been prepared in
accordance with the accounting principles generally accepted in the United
States of America ('US GAAP') for interim financial statements. The accounting
policies applied are consistent with those set out in the Consolidated
Financial Statements for the year ended 31 December 2013.
Certain insignificant reclassifications have been made to prior period amounts
to conform to the 2014 presentation.
2 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.
Net underwriting contribution by segment for the period ended 30 June 2014 is
as follows:
(US dollars in millions) London Bermuda US International Total
Gross premiums written $1,639 $476 $710 $835 $3,660
Net premiums earned 964 223 431 420 2,038
Losses and loss expenses (453) (78) (262) (238) (1,031)
Policy acquisition costs (233) (53) (91) (94) (471)
Net underwriting contribution $278 $92 $78 $88 $536
Net underwriting contribution by segment for the period ended 30 June 2013 is
as follows:
(US dollars in millions) London Bermuda US International Total
Gross premiums written $1,473 $465 $643 $718 $3,299
Net premiums earned 902 233 410 368 1,913
Losses and loss expenses (433) (108) (267) (237) (1,045)
Policy acquisition costs (216) (53) (80) (78) (427)
Net underwriting contribution $253 $72 $63 $53 $441
The effects of intra-Group reinsurance contracts are excluded from segmental
revenue and results, as this is the basis upon which the performance of each
segment is assessed.
The components of net underwriting contribution shown above are reported on
the face of the Consolidated Income Statements. No other items of revenue or
expenses are managed on a segmental basis.
Assets are reviewed in total by management for the purpose of decision making.
The Group does not allocate assets to the reporting segments.
3 Investments
Fixed maturities
The fair values of fixed maturities at 30 June 2014 and 2013 are as follows:
(US dollars in millions) 2014 2013
US government and agencies $1,241 $703
Non-US governments 1,699 1,430
Corporate securities 2,390 1,828
Asset-backed securities 838 717
Mortgage-backed securities 680 805
Interest rate derivative contracts 1 12
Credit default derivative contracts (3) -
Total fixed maturities $6,846 $5,495
Fixed maturities at 30 June 2014 and 2013, 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.
(US dollars in millions) 2014 2013
Due in one year or less $393 $450
Due after one through five years 3,859 2,644
Due after five years through ten years 910 750
Due after ten years 168 117
5,330 3,961
Asset-backed securities 838 717
Mortgage-backed securities 680 805
Interest rate derivative contracts 1 12
Credit default derivative contracts (3) -
Total fixed maturities $6,846 $5,495
The Group did not have an aggregate investment with a single counterparty,
other than the US government, in excess of 10 per cent of total investments at
30 June 2014 and 2013.
Included within cash and cash equivalents at 30 June 2014 are deposits of $317
million managed centrally by Lloyd's, which are primarily invested in fixed
maturity securities.
Other invested assets
Other invested assets by category at 30 June 2014 and 2013 are as follows:
(US dollars in millions) 2014 2013
Hedge funds $12 $28
Equity funds 87 58
Equity securities 261 252
Loan instruments 200 170
Other invested assets at fair value 560 508
Equity method investments 41 29
Total other invested assets $601 $537
Hedge funds are a portfolio comprising nine individual hedge funds. The Group
has issued redemption notices in respect of all hedge funds and has received
the majority of the proceeds. The balance will be paid on the completion of
the final fund audit or the disposal of remaining investments.
Equity funds are a portfolio comprising six individual private equity funds,
three of which were entered into in 2011 and three in 2013. The equity funds
have initial investment periods of up to five years.
Equity securities comprise $211 million of quoted equity securities and $50
million of private equity.
Loan instruments comprise holdings in syndicated loans and other unquoted
private debt.
There are unfunded commitments related to investments in funds of $67 million
as at 30 June 2014 (30 June 2013: $40 million).
Equity method investments comprise investments over which the Group exercises
significant influence. These investments are accounted for using the equity
method. At 30 June 2014, for the majority of the investments, the Group owned
between 22.5 per cent and 50.0 per cent interests in these entities. The share
of losses of equity method investments included within the Consolidated Income
Statements was $2 million (2013: $1 million profit). In management's opinion
the fair value of these investments is not less than their carrying value.
Net investment return
The components of net investment return for the periods ended 30 June 2014 and
2013 are as follows:
(US dollars in millions) 2014 2013
Investment income $69 $61
Net gains/(losses) on fixed maturities and short-term investments 25 (76)
Net gains on other invested assets 54 31
Total investment return 148 16
Investment expenses (6) (7)
Net investment return $142 $9
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 for Letters of Credit
('LOCs'), as described in Note 12. Finally, the Group also utilises trust
funds set up for the benefit of certain ceding companies as an alternative to
LOCs.
The total value of these restricted assets by category at 30 June 2014 and
2013 are as follows:
(US dollars in millions) 2014 2013
Fixed maturities $2,837 $2,858
Short-term investments 28 52
Cash and cash equivalents 509 868
Total restricted assets $3,374 $3,778
4 Derivative financial instruments
The Group is exposed to certain risks relating to its ongoing business
operations. Risks managed by using derivative instruments include interest
rate risk, foreign exchange risk, credit risk and equity risk. Derivatives are
also used for efficient portfolio management.
Interest rate risk
The investment portfolio is predominantly invested in cash and fixed income
securities and so is exposed to interest rate risk. Interest rate option and
swap contracts are entered into in order to manage the market risk associated
with holding fixed income securities and also to manage any duration mismatch
between assets and liabilities.
Gains and losses on interest rate derivative contracts are included in net
investment return together with related gains/(losses) on fixed maturities in
the Consolidated Income Statements. Interest rate derivative contracts' fair
value is included in fixed maturities on the Consolidated Balance Sheets.
Credit risk
Part of the investment portfolio is invested in bonds issued by corporate
issuers and so is exposed to the default risk of the underlying issuers and
also to mark-to-market fluctuations arising from the market's evaluation of
this risk. Credit default option and swap contracts are entered into in order
to manage the credit risk associated with holding these securities.
Gains and losses on credit default options are included in net investment
return together with related gains/(losses) on fixed maturities in the
Consolidated Income Statements. Credit default derivative contracts' fair
value is included in fixed maturities on the Consolidated Balance Sheets.
Equity risk
A portion of the investment portfolio is invested in equity securities and
hedge funds. Equity market option contracts are entered into to manage the
market risk associated with holding these equity securities and for efficient
portfolio management.
Gains and losses on equity market derivative contracts are included in net
investment return together with related gains/(losses) on other invested
assets in the Consolidated Income Statements. Equity market derivative
contracts' fair value is included in other invested assets on the Consolidated
Balance Sheets.
Foreign exchange risk
During the period, the Group held various foreign currency derivatives to
manage currency risk. Gains and losses on foreign exchange contracts are
included in net gains/(losses) on foreign currency in the Consolidated Income
Statements. Foreign exchange contracts' fair value is included in other assets
on the Consolidated Balance Sheets.
Impact of derivatives
The fair values of derivatives at 30 June 2014 and 2013 are as follows:
2014 2013
(US dollars in millions) Gross Gross Net amount Gross Gross Net amount
amount of amount in the amount of amount in the
recognised offset in the balance recognised offset in balance
assets balance sheet assets the balance sheet
sheet sheet
Interest rate derivative contracts $3 $(2) $1 $12 $- $12
Credit default derivative contracts - (3) (3) 1 (1) -
Foreign exchange contracts - - - 1 - 1
Total derivatives $3 $(5) $(2) $14 $(1) $13
Cash collateral related to derivatives not offset in the balance sheet was $21
million at 30 June 2014 (2013: $4 million).
The notional values of open derivatives at 30 June 2014 and 2013 are as
follows:
Notional value
(US dollars in millions) 2014 2013
Interest rate options $200 $200
Interest rate swap contracts 1,479 350
Credit default swap option contracts 1,000 900
Credit default swap contracts 33 23
Equity market option contracts - 2
Foreign exchange contracts 14 143
The net gains/(losses) on derivatives for the period ended at 30 June 2014 and
2013 are as follows:
(US dollars in millions) 2014 2013
Interest rate derivative contracts $(32) $7
Credit default derivative contracts (2) (7)
Equity market derivative contracts 4 (1)
Foreign exchange contracts 1 (1)
Net losses on derivatives $(29) $(2)
The derivatives contracts held by the Group at 30 June 2014 contain no
contingent features related to the Group's credit risk.
During 2014, derivatives were used in the investment portfolio to manage tail
risks, modify duration positioning, and for efficient portfolio and risk
capital management. The interest rate swaps were used to shorten duration, and
interest rate options were used to provide protection against the tail risk of
large falls in interest rates. The credit default derivative contracts
provided protections for the credit risk in the portfolio. Equity market
derivative contracts were utilised both for tail risk protection and efficient
portfolio management.
5 Fair value measurement
The FASB accounting guidance on fair value measurements and disclosures
defines fair value as the price that would be received to sell an asset or
paid to transfer a liability (i.e. the 'exit price') in an orderly transaction
between market participants at the measurement date. In determining fair
value, management uses various valuation approaches, including market and
income approaches. The FASB accounting guidance establishes a hierarchy for
inputs used in measuring fair value that maximises the use of observable
inputs and minimises the use of unobservable inputs by requiring that the most
observable inputs be used when available. The three levels of the FASB
accounting guideline on fair value measurements and disclosures hierarchy are
described below.
Level 1 - Valuations based on quoted prices in active markets for identical
assets or liabilities that the Group has the ability to access. Since
valuations are based on quoted prices that are readily and regularly available
in an active market, valuation of these products does not entail a significant
degree of judgment.
Assets utilising Level 1 inputs comprise US government securities and quoted
exchange-traded instruments.
Level 2 - Valuations based on quoted prices in markets that are not active or
for which significant inputs are observable (e.g. interest rates, yield
curves, prepayment speeds, default rates, loss severities, etc.) or can be
corroborated by observable market data.
Assets and liabilities utilising Level 2 inputs include: US agency securities;
non-US government obligations, corporate and municipal bonds, residential
mortgage-backed securities ('RMBS'), commercial mortgage-backed securities
('CMBS') and asset-backed securities ('ABS') to the extent that they are not
identified as Level 3 items; over-the-counter ('OTC') derivatives (e.g.
foreign exchange contracts and interest rate contracts); fixed-term cash
deposits classified as short-term investments; private debt with readily
available prices; and investments in funds with few restrictions on
redemptions or new investors.
Level 3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement. The unobservable inputs reflect our own
assessment of assumptions that market participants might use.
Assets utilising Level 3 inputs include: investments in funds with significant
redemption restrictions; unquoted private equity and debt not qualifying as
Level 2; collateralised debt obligations ('CDOs'); and sub-prime securities,
Alt-A securities and securities rated CCC and below, where the unobservable
inputs reflect individual assumptions and judgments regarding ultimate
delinquency and foreclosure rates and estimates regarding the likelihood and
timing of events of defaults.
The availability of observable inputs can vary from financial instrument to
financial instrument and is affected by a wide variety of factors, including,
for example, the type of financial instrument, whether the financial
instrument is new and not yet established in the marketplace, and other
characteristics particular to the transaction. To the extent that valuation is
based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining
fair value is greatest for instruments categorised in Level 3. The Group uses
prices and inputs that are current as of the measurement date, including
during periods of market dislocation. In periods of market dislocation, the
observability of prices and inputs may be reduced for many instruments. This
condition could cause an instrument to be reclassified between levels.
Assets and liabilities measured at fair value on a recurring basis
The table below shows the values at 30 June 2014 of assets and liabilities
measured at fair value on a recurring basis, analysed by the level of inputs
used.
(US dollars in millions) Balance as at Level 1 Level 2 Level 3
30 June 2014 inputs inputs inputs
Assets
US government and agencies $1,241 $809 $432 $-
Non-US governments 1,699 - 1,699 -
Corporate securities 2,390 - 2,381 9
ABS 838 - 838 -
RMBS 677 - 664 13
CMBS 3 - 3 -
Interest rate derivative contracts 1 - 1 -
Credit default derivative contracts (3) - (3) -
Total fixed maturities 6,846 809 6,015 22
Short-term investments 202 - 202 -
Other invested assets at fair value 560 211 165 184
Foreign exchange derivative contracts - - - -
Total assets at fair value $7,608 $1,020 $6,382 $206
The table below shows the values at 30 June 2013 of assets and liabilities
measured at fair value on a recurring basis, analysed by the level of inputs
used.
(US dollars in millions) Balance as at Level 1 Level 2 Level 3
30 June 2013 inputs inputs inputs
Assets
US government and agencies $703 $310 $393 $-
Non-US governments 1,430 - 1,430 -
Corporate securities 1,828 - 1,820 8
ABS 717 - 684 33
RMBS 717 - 660 57
CMBS 88 - 78 10
Interest rate derivative contracts 12 - 12 -
Credit default derivative contracts - - - -
Total fixed maturities 5,495 310 5,077 108
Short-term investments 102 5 97 -
Other invested assets 508 179 148 181
Foreign exchange derivative contracts 1 - 1 -
Total assets at fair value $6,106 $494 $5,323 $289
The changes in the period in balances measured at fair value on a recurring
basis using Level 3 inputs were as follows:
(US dollars in millions) Total Corporate ABS RMBS CMBS Other
invested
assets
Balance 1 January 2014 $271 $10 $28 $49 $12 $172
Total net gains included in income 10 - - 1 2 7
Acquisitions 43 - - - - 43
Disposals (118) (1) (28) (37) (14) (38)
Balance 30 June 2014 $206 $9 $- $13 $- $184
Amount of gains relating to balances still held at period end $7 $- $- $- $- $7
There were no transfers to or from Level 3 during the period.
The changes in the period ended 30 June 2013 in balances measured at fair
value on a recurring basis using Level 3 inputs were as follows:
(US dollars in millions) Total Corporate ABS RMBS CMBS Other
invested
assets
Balance 1 January 2013 $233 $16 $24 $41 $6 $146
Total net gains included in income 20 6 - 1 1 12
Acquisitions 99 9 13 19 4 54
Disposals (43) (13) (4) (4) (1) (21)
Transfers out of Level 3 (20) (10) - - - (10)
Balance 30 June 2013 $289 $8 $33 $57 $10 $181
Amount of gains/(losses) relating to balances still held at period end $9 $(1) $- $- $- $10
Corporate assets transferred out of Level 3 were the result of a credit
upgrade during the year. Other invested assets transferred out of Level 3 were
the result of an exchange listing of a previous private equity holding.
Fair value of financial instruments
The following methods and assumptions are used by the Group in estimating the
fair value of its financial instruments:
Fixed maturities and short-term investments
Fair values of fixed maturities and short-term investments are based on the
quoted market price of these securities provided by either independent pricing
services, or, when such prices are not available, by reference to broker or
underwriting bid indications.
The Group's Level 3 fixed maturities consist of corporate securities, ABS,
RMBS and CMBS, for which pricing vendors and non-binding broker quotes are the
primary source of the valuations. The Group compares the price to independent
valuations, which may also consist of broker quotes, to assess if the prices
received represent a reasonable estimate of the fair value. Although the Group
does not have access to the specific unobservable inputs that may have been
used in the fair value measurements of ABS, RMBS and CMBS, the Group would
expect that the significant inputs considered are prepayment rates,
probability of default, loss severity in the event of default, recovery rates,
liquidity premium and reinvestment rates. Significant increases or decreases
in any of those inputs in isolation could result in a significantly different
fair value measurement. Generally, a change in the assumption used for the
probability of default is accompanied by a directionally similar change in the
assumption used for the loss severity and a directionally opposite change in
the assumption used for prepayment rates.
Other invested assets
The fair value of investments in funds is based on the net asset value
provided by the funds' administrators. The fair values of holdings in equity
and loan instruments are based on the market price of these securities
provided by independent pricing services, or, when such prices are not
available, by reference to broker or underwriting bid indications provided by
administrators and recent transactions, if any.
The Group's Level 3 other invested assets consist of investments in funds with
significant redemption restrictions and unquoted private equity and debt, for
which manager NAV statements are the primary source of the valuations.
Although the Group does not have access to the specific unobservable inputs
that may have been used in the fair value measurements, the Group would expect
the significant inputs for private equity and debt to be discounted cash flows
and valuations of similar sized peers. Significant increases or decreases in
any of those inputs in isolation could result in a significantly different
fair value measurement.
Derivatives
The fair values of interest rate, foreign exchange, equity market and credit
default derivative contracts are based on prices provided by independent
pricing services.
Subordinated debt
Subordinated debt is carried at amortised cost. At 30 June 2014, the fair
value of the subordinated debt was $87 million, which compared to a carrying
value of $93 million. The fair value of the subordinated debt is estimated by
comparing the Group's non-controlling preferred stock and other peer group
instruments to determine market required yields. As such, fair value of
subordinated debt is classified as Level 2.
Other assets and liabilities
The fair values of cash and cash equivalents, premiums and other receivables,
and accounts payable approximate their carrying value due to the immediate or
short term maturity of these financial instruments.
6 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 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 that they have made a reasonable
estimate of the level of reserves at 30 June 2014 and 2013.
The reconciliation of unpaid losses and loss expenses for the six months ended
30 June 2014 and 2013 is as follows:
(US dollars in millions) 2014 2013
Gross unpaid losses and loss expenses, beginning of period $6,709 $6,686
Reinsurance recoverable on unpaid losses and loss expenses (1,336) (1,400)
Net unpaid losses and loss expenses, beginning of period 5,373 5,286
Net incurred losses and loss expenses for claims related to:
Current period 1,080 1,101
Prior periods (49) (56)
Total net incurred losses and loss expenses 1,031 1,045
Net paid losses and loss expenses for claims related to:
Current period (242) (205)
Prior periods (711) (789)
Total net paid losses and loss expenses (953) (994)
Foreign exchange and other 20 (78)
Net unpaid losses and loss expenses, end of period 5,471 5,259
Reinsurance recoverable on unpaid losses and loss expenses 1,374 1,425
Gross unpaid losses and loss expenses, end of period $6,845 $6,684
As a result of the changes in estimates of insured events in prior years, the
2014 reserves for losses and loss expenses net of reinsurance recoveries
decreased by $49 million (2013: $56 million). The decrease in reserves
relating to prior years was due to better than expected claims development and
reductions in uncertainty surrounding the quantifications of the net cost
claim events.
7 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:
2014 2013
(US dollars in millions) Premiums Premiums Lossesincurred Premiums Premiums Lossesincurred
written earned written earned
Direct $1,893 $1,704 $882 $1,761 $1,571 $763
Assumed 1,767 986 425 1,538 912 513
Ceded (1,053) (652) (276) (862) (570) (231)
Net premiums $2,607 $2,038 $1,031 $2,437 $1,913 $1,045
The Group's reinsurance recoverable on unpaid and paid losses as at 30 June
2014 and 2013 is as follows:
(US dollars in millions) 2014 2013
Gross reinsurance recoverable $1,588 $1,561
Provision for uncollectible balances (31) (29)
Net reinsurance recoverable $1,557 $1,532
8 Taxation
Bermuda
Under current Bermuda law neither the Company nor its Bermuda subsidiaries are
required to pay any taxes in Bermuda on their income or capital gains. Both
the Company and its Bermuda subsidiaries 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 2035.
United Kingdom
The Group also operates in the United Kingdom through its UK subsidiaries, and
the income of the UK companies is subject to UK corporation taxes.
The Finance Bill 2013 introduced a reduction to the UK corporation tax rate
from 23 per cent to 21 per cent from 1 April 2014 and to 20 per cent from 1
April 2015. The impact of these rate reductions was fully reflected in
deferred tax at 31 December 2013 and therefore at 30 June 2014.
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 IRS 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 operates in the United States through its subsidiaries, and their
income is subject to both US state and federal income taxes.
Switzerland
The Group also operates in Switzerland through its subsidiaries, and their
income is subject to Swiss federal and cantonal taxes.
Other international income taxes
The Group has a network of international operations, and they are also subject
to income taxes imposed by the jurisdictions in which they operate, but they
do not constitute a material component 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 2014 and 2013 is as
follows:
(US dollars in millions) 2014 2013
Current tax expense $3 $3
Deferred tax expense 18 2
Change in uncertain tax positions 2 -
Income tax expense $23 $5
The Group records income taxes for the period based on the estimated effective
annual rates for the years ending 31 December 2014 and 2013.
Unrecognised tax benefits
As at 30 June 2014, the Group's liability amount of uncertain tax benefits was
$9 million (2013: $13 million). During the period $8 million of uncertain tax
liability became payable and was reclassified to deferred tax. All
unrecognised tax benefits would affect the effective tax rate if recognised.
9 Stockholders' equity
The following sets out the number and par value of shares authorised, issued
and outstanding as at 30 June 2014 and 2013:
2014 2013
Common stock, par value $0.01
Authorised 500,000,000 500,000,000
Issued 362,089,787 361,886,898
Stock held by Employee Benefit Trust (2,760,139) (5,064,663)
Outstanding 359,329,648 356,822,235
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 and warrants 36,250 62,894
Balance 30 June 362,089,787 361,886,898
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 2,300,000 of the Group's shares at an average
price of $9.10 (£5.52) per unit. The total amount paid for treasury stock of
$21 million is shown as a deduction to stockholders' equity. The cumulative
cost of shares held by the EBT of $30 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).
Non-controlling preferred stock dividend
On 19 January 2014 Catlin Bermuda paid a dividend of $22 million to the
stockholders of the non-cumulative perpetual non-controlling preferred stock.
10 Employee stock compensation schemes
The Group has a number of employee stock compensation schemes 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 cost of all plans expensed in the six months
ended 30 June 2014 was $31 million (2013: $12 million).
From 2014, awards are made under the Performance Share Plan ('PSP'), adopted
in 2013. This replaces the previous PSP, adopted in 2004, under which awards
were made in 2013 and prior years. In February 2014, Standard Awards
comprising a total of 3,896,040 options with $nil exercise price and 1,482,827
non-vested shares (total of 5,378,867 securities) were awarded to Group
employees under the PSP. 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 to Group executive management. Up to half of these securities
will vest in 2017 and up to half will vest in 2018, subject to certain
market-based conditions.
In February 2014 a total of 2,168,384 options with $nil exercise price and
869,842 non-vested shares (total of 3,038,226 securities) were awarded to
Group employees under the Group's Incentive Share Plan ('ISP'). Half of the
securities will vest in 2017 and half will vest in 2018, subject to continued
service.
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.
In addition, 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.
11 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 period.
Diluted earnings per share are 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 periods presented:
(i) PSP;
(ii) ISP;
(iii) Deferred Bonus Shares;
(iv) All-Employee Share Plans.
Income to common stockholders is arrived at after deducting non-controlling
preferred stock dividends of $22 million (2013: $22 million).
Reconciliations of the number of shares used in the calculations as at 30 June
2014 and 2013 are set out below.
2014 2013
Weighted average number of shares 358,300,243 353,515,294
Dilution effect of stock options and non-vested shares 31,021,671 11,707,052
Weighted average number of shares on a diluted basis 389,321,914 365,222,346
Earnings per common share
Basic $0.76 $0.34
Diluted $0.70 $0.32
12 Commitments and contingencies
Legal proceedings
The Group is party to a number of legal proceedings arising in the ordinary
course of the Group's business which have not been finally adjudicated. While
the results of the litigation cannot be predicted with certainty, management
believes that the outcome of these matters will not have a material impact on
the results of operations or financial condition of the Group.
Concentrations of credit risk
Areas where significant concentration of risk may exist include investments,
reinsurance recoverable, and cash and cash equivalent balances.
The cash balances and investment portfolio are managed following prudent
standards of diversification. Specific provisions limit the allowable holdings
of a single institution issue and issuers. Similar principles are followed for
the purchase of reinsurance. The Group believes that there are no significant
concentrations of credit risk associated with its investments or its
reinsurers.
Letters of credit
The Group arranges letter of credit facilities to support its reinsurance
business and for general corporate purposes.
As at 30 June 2014, the Group has access to the following letter of credit
facilities:
· A $450 million unsecured multi-bank facility available for utilisation
by appointed members of the Group and guaranteed by the Company. As at 30 June
2014, $147 million of letters of credit were issued under this facility. The
facility has a termination date of 31 December 2016.
· A bilateral facility available for utilisation by Catlin Bermuda,
collateralised by pledged financial assets. As at 30 June 2014, $168 million
of letters of credit were issued under this facility.
· A bilateral facility available for utilisation by Catlin Re
Switzerland, collateralised by pledged financial assets. As at 30 June 2014,
$19 million of letters of credit were issued under this facility.
· Four bilateral facilities available for utilisation by Catlin Bermuda
and guaranteed by the Company for Funds at Lloyd's purposes, amounting to a
total of $375m. As at 30 June 2014, $375 million of letters of credit were
issued under these facilities. One of the facilities has an expiry date of 31
December 2017, while the other three have expiry dates of 31 December 2018.
· An Australian $50 million ($47 million) unsecured bilateral facility,
available for utilisation by appointed members of the Group and guaranteed by
the Company, for the purpose of providing collateral to Australian
beneficiaries. As at 30 June 2014, Australian $49 million ($46 million) of
letters of credit were issued under this facility.
· Two unsecured bilateral facilities, available for utilisation by
appointed members of the Group and guaranteed by the Company amounting to $150
million. As at 30 June 2014, $132 million of letters of credit were issued
under this facility.
· A facility managed by Lloyd's, acting for the Syndicates. As at 30 June
2014, $8 million of letters of credit were issued under this facility.
· Catlin US has letters of credit amounting to $1 million issued for the
benefit of various parties.
13 Subsequent events
Proposed dividend
On 7 August 2014 the Board approved a proposed interim dividend of 10.5 pence
per share (17.7 cents), payable on 22 September 2014 to stockholders of record
at the close of business on 22 August 2014.
The 2014 interim dividend represents a 5 per cent increase over the 2013
interim dividend of 10 pence per share (15.5 cents). The interim dividend is
payable in sterling.
Non-controlling preferred stock dividend
The Board of Catlin Bermuda approved a dividend of $22 million to the
stockholders of the non-cumulative perpetual non-controlling preferred stock.
This dividend was paid on 19 July 2014.
Management has evaluated subsequent events until 7 August 2014, the date of
issuance of the financial statements.
Independent Review Report to Catlin Group Limited
Report on the Consolidated Interim Financial Statements
Our conclusion
We have reviewed the Consolidated Interim Financial Statements, defined below,
in the Half-Yearly Financial Report of Catlin Group Limited for the six months
ended 30 June 2014. Based on our review, nothing has come to our attention
that causes us to believe that the Consolidated Interim Financial Statements
are not prepared, in all material respects, in accordance with accounting
principles generally accepted in the United States of America and the
Disclosure and Transparency Rules of the United Kingdom's Financial Conduct
Authority.
This conclusion is to be read in the context of what we say in the remainder
of this report.
What we have reviewed
The consolidated interim financial statements, which are prepared by Catlin
Group Limited, comprise:
· the Consolidated Balance Sheets as at 30 June 2014;
· the Consolidated Income Statements and Statements of Comprehensive
Income for the period then ended;
· the Consolidated Statements of Changes in Stockholders' Equity for the
period then ended; and
· The Consolidated Statements of Cash Flows for the period then ended;
· the explanatory notes to the Consolidated Interim Financial
Statements.
As disclosed in Note 1, the financial reporting framework that has been
applied in the preparation of the full annual financial statements of the
Group are accounting principles generally accepted in the United States of
America.
The consolidated interim financial statements included in the Half-Yearly
Financial Report have been prepared in accordance with accounting principles
generally accepted in the United States of America and the
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