The Value of Insurance - BMA · The Value of Insurance Catlin Group Limited is an international...

Catlin Group Limited Annual Report and Accounts 2011

Catlin G

roup Limited A

nnual Report and A

ccounts 2011

The Value of Insurance

London/UK

Canada

US

Bermuda

Europe

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Catlin Group Limited is an international specialty property/casualty insurer and reinsurer. We operate worldwide through six underwriting hubs.

Insurance and reinsurance are essential components of the global economy. Businesses could not operate without insurance, and individuals place their personal wealth and possessions at risk without adequate coverage.

In an extraordinary year for natural catastrophes, the value of insurance has been increasingly recognised.

Our Values

Five core values are shared by Catlin employees globally and form the foundation for our actions and behaviour.

The values are:

– Transparency– Accountability– Teamwork– Integrity – Dignity

Our Objectives

ClientsCatlin seeks to be clients’ insurer or reinsurer of choice. We fulfil this goal by delivering outstanding underwriting and claims service and providing excellent financial security.

ShareholdersCatlin aims to build shareholder value by achieving a weighted average return on equity that is ten percentage points higher than the risk-free rate over the course of a cycle.

EmployeesWe offer our employees a high-performance culture where they can fulfil their personal ambitions. We aim to align our employees’ interests with those of shareholders and clients.


1About CatlinCatlin Group Limited Annual Report and Accounts 2011

Operational and Financial Highlights

About Catlin1. Operational and Financial Highlights2. What We Do and Where We Do It3. Superior Performance in Challenging Times4. The Value of a Clearly Defined Strategy6. The Value in Our Values8. The Value of Insurance

Strategic Review10. Key Performance Indicators12. Chairman’s Statement14. Chief Executive’s ReviewDisciplined Underwriting18. Underwriting Review 27. DistributionDiversification28. Our Underwriting Hubs30. London/UK31. Bermuda32. US33. Asia-Pacific34. Europe 35. CanadaCapital Preservation and Flexibility36. Capital40. Risk Management44. InvestmentsCulture/Corporate Responsibility46. The Catlin Culture58. The Catlin Brand

Financial Review60. Financial Review66. Loss Reserve Development

Financial Statements70. Report of the Independent Auditors71. Financial Statements and Notes

Corporate Governance96. Board of Directors98. Directors’ Report101. Corporate Governance Report105. Directors’ Remuneration Report112. Investor Relations115. Glossary116. Five-Year Financial Summary

Gross premiums written

12% increase

Profitable growth produced by Catlin’s global infrastructure

Gross premiums written increased by 12 per cent Group-wide in 2011; the non-London/UK hubs’ volume increased by 24 per cent.

Catlin’s international distribution structure is designed to produce pro!table growth in all phases of the market cycle.

Attritional loss ratio

50.0%Commitment to disciplined underwriting

The attritional loss ratio (which excludes catastrophe and large single-risk losses and reserve releases) was the lowest in !ve years.

Excellent underlying underwriting performance in a dif!cult rating environment for many business classes.

Demonstrates emphasis on capital preservationCatlin’s solid capital base has been maintained to allow the Group to take advantage of emerging opportunities.

Net catastrophe losses US$m

US$678 An unprecedented series of natural disasters produced what may become the worst year on record for insured catastrophe losses.

Profit before tax US$m

US$71Continued value to shareholders through dividends

The catastrophe losses reduced the Group’s pro!ts, but it continues to provide a return that meets the Group’s long-term targets.

Catlin increased its annual dividend by 6 per cent to 28.0 UK pence (44.9 US cents), re"ecting con!dence in the Group’s future prospects.

About C

atlin

2 About Catlin

Achievinggeographic

diversi!cationworldwide

2001

$434mGross premiums

written

2011

$4.5bnGross premiums

written


What We Do and Where We Do It

Six product groupsAerospaceClasses underwritten include Airlines, General Aviation, Airports and Space/Satellites

CasualtyClasses underwritten include General Liability, Professional Lines, Healthcare Liability, Motor, Financial Lines

Energy/MarineClasses underwritten include Upstream and Downstream Energy, Energy Liability, Hull, Cargo, Specie

PropertyClasses underwritten include Property, Construction & Engineering, Binding Authorities

ReinsuranceIncludes Property, Casualty, Marine & Aviation, Agriculture & Specialty

Specialty/War & Political RiskIncludes War & Political Risks, Terrorism, Credit, Product Recall, Kidnap & Ransom, Accident & Health/Life, Equine/Livestock, Aquaculture

The five non-London/UK hubs accounted for 48 per cent of Catlin’s gross premiums written in 2011 (2001: 5 per cent).

London/UK2001 2011

$412m $2.3bn

Bermuda2001 2011

$0m $549m

US2001 2011

$10m $852m Asia-Pacific

2001 2011

$12m $304m

Europe2001 2011

$0m $354m

Canada2001 2011

$0m $112m

Our underwriting hubs

Development of hubs: 2001-2011

3About Catlin

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

120

100

80

60

40

20

0


Superior Performance in Challenging Times

An extraordinary year for natural catastrophesInsured natural catastrophe losses amounted to more than US$100 billion in 2011, the second costliest year on record. Should loss estimates deteriorate further, natural catastrophe losses in 2011 could exceed the US$113 billion in insured losses experienced by insurers in 2005.

Catlin incurred nearly US$1 billion in natural catastrophe losses during 2011 (US$678 million net of reinsurance). However, due to a strong underlying underwriting performance and a consistent and robust risk-transfer programme, the Group reported a US$71 million pre-tax profit and retained its solid capital base.

20019/11 World Trade Center (US)The 9/11 tragedy was the most costly man-made event ever

2005Hurricane Katrina (US)Three of the ten largest insured losses in history occurred in 2005, including Hurricane Katrina

2011Earthquake/Tsunami (Japan)2011 saw the greatest number of large natural catastrophe losses on record

Source: Munich Re; losses indexed to 2011 values

About C

atlin

4 About Catlin Catlin Group Limited Annual Report and Accounts 2011

The Value of a Clearly Defined StrategySince Catlin was established in 1984, we have endeavoured to build a business for the future and to fulfil an ambition to be the preferred global specialty insurer and reinsurer. The consistent Catlin strategy is designed to realise these goals and to ensure that our interests are aligned with those of our shareholders.

1. Disciplined underwriting

3. Capital preservation and flexibility

2. Diversification

4. Culture

Catlin emphasises the preservation of capital. We seek to enhance returns by balancing non-correlated classes with more volatile classes, which builds book value over time. Risk transfer is used to protect capital from the impact of extreme events, Investments are managed to produce good returns without undue risk. Our corporate structure allows capital to be allocated ef!ciently to areas of the business presenting the best pro!t opportunities. See page 36

Catlin has developed a distinctive and ef!cient international structure. We operate underwriting hubs in the world’s major insurance markets, whilst retaining a single set of core values that are the foundation for our actions and behaviour globally. We continually look for opportunities to diversify our risk portfolio, both by region and by class of business, to produce superior results over the long term. See page 28

Catlin focuses on underwriting pro!t, not top-line growth. We reject business that does not meet minimum standards. We seek to maximise pro!ts during all phases of an underwriting cycle through superior portfolio management, technical excellence and maximum utilisation of our broad distribution capabilities. See page 18

Catlin’s operations are based on !ve core values. Using these values, we seek to be a responsible partner to clients and brokers and strive to offer excellent service, both as underwriters and following a claim. Our culture helps us attract and retain high-calibre employees and encourages us to make meaningful contributions to the communities in which we operate. See page 46

5About Catlin

1.Underwriting

2.Investment

management

3.Claims

management

Ourbusiness

model

Outstanding people, processes and system

s

Catlin values/risk management

Catlin’s business

model is designed to ensure that our strategic principles – underwriting discipline, diversi!cation, capital preservation and

"exibility, and culture – are effectively delivered

for the bene!t of shareholders.


“Our ambition is to be the world’s preferred specialty insurer and reinsurer… the underwriter with which clients and their brokers choose to work. We do this by attracting outstanding people around the world who consistently deliver excellent service.”

Stephen CatlinChief Executive

How it worksOur business model

What we do1. Underwriting. We underwrite a balanced portfolio of insurance and reinsurance. Underwriting strategy focuses on technical pricing, access to different types of business on a global basis and superior portfolio management. See page 18

2. Investment management. Catlin invests US$8.4 billion in assets. Our investment goal is the creation of economic value, taking into account both the asset and liability sides of the balance sheet. See page 44

3. Claims management. Catlin understands that an insurer’s true value is demonstrated to clients following a claim. We believe that the superior service we provide to assureds and brokers after a claim represents a distinct competitive advantage. See page 49

How we do it betterOutstanding people, processes and systems. Catlin’s greatest asset is our people. We align our employees’ interests with those of shareholders, and rewards are linked to performance, particularly the creation of shareholder value. We also ensure we supply our employees with !rst-class systems and business processes. See page 50

Catlin values/risk management. Our core values – transparency, accountability, teamwork, integrity and dignity – are integrated throughout the business, as is a comprehensive risk management programme to ensure the preservation of capital. See pages 40 and 47

Catlin performs three primary functions:

underwriting insurance and reinsurance; investing assets; and managing and paying claims.

Catlin’s goal is to produce outstanding results by employing highly talented people and giving them the best possible tools with which to work. Catlin’s corporate culture permeates the business as does a sophisticated risk management framework.

About C

atlin

6 About Catlin

2.

1.

3.

4.

5.


The Value in Our Values

Catlin has grown substantially over the past decade, but one thing has not changed: the Group’s commitment to five core values. Our commitment to these values is what we believe differentiates Catlin from many other companies in our sector and is a primary reason for our success.

A lot of companies talk about principles, but at Catlin we make sure that all of our employees – no matter where in the world they work – follow the same set of values. One of the criteria we use to appraise our employees’ performance is how their actions and behaviour embody our five core values.

We believe that if our employees truly embrace these five values, Catlin will achieve its ambitions as a company and provide meaningful value to our clients, our shareholders and all of our employees.

1. Transparency 2. Accountability 3. Teamwork 4. Integrity 5. Dignity

Our values

Five core values form the basis of the Catlin culture. They are the foundation for our actions, behaviours and the decisions we make.

1. Transparency Catlin encourages open communication, both with clients and brokers and among employees. See page 60

2. Accountability Employees are expected to take responsibility for their actions and decisions. They should think and act like owners. See page 8

3. Teamwork Employees should act in the best interests of the Group as a whole, not their own of!ce or function. Catlin’s single bonus plan supports this ‘Group-!rst’ mentality. See page 18

4. Integrity Employees’ conduct must re"ect the highest ethical standards and subscribe to the Catlin Code of Ethical Conduct. See page 7

5. Dignity Catlin employees are expected to treat clients, brokers, other counterparties and their fellow workers fairly and with respect. See page 46


Robina MalikUK General Counsel

FunctionLegal

HubLondon/UK

OfficeLondon

BirthplaceLondon

Joined Catlin1993

What I DoRobina Malik

As part of Catlin’s in-house legal team, I advise on a broad range of commercial and corporate issues as well as banking, property and employment. I work not only with Catlin staff in the UK but also in Bermuda, Canada and Asia. The work is challenging, and one day is never the same as another. The parts of my job that I enjoy most are problem solving and helping our people achieve their commercial goals.

“ Integrity is vital to Catlin’s business. Acting with integrity ensures that we attain the confidence of our business partners and counterparties so they know they can rely on us to do what we say we will do.”

Robina MalikUK General CounselLondon

About C

atlin

8 About Catlin Catlin Group Limited Annual Report and Accounts 2011

What I DoLinmao Li

I lead Catlin’s operations in China. Accountability is particularly important in an emerging market such as China, where despite the growth of our portfolio, we are still in the process of raising awareness of the Catlin brand. We do that primarily by ensuring that we provide innovative products and high-quality services.

“ Accountability involves how we deliver our promises to clients and brokers, as well as how we internally manage the way we underwrite. Accountability is essential to everything we do.”

Linmao LiHead of ChinaShanghai

Linmao LiHead of China

FunctionUnderwriting

HubAsia-Pacific

OfficeShanghai

BirthplaceManchuria, China

Joined Catlin1999



To most people, insurance is not interesting. No one really likes to buy it. It’s simply not a lot of fun, like cars, clothes or computers can be.

However, during a year in which natural catastrophes caused more than US$100 billion in insured damage worldwide and an unquantifiable amount of human misery, insurance has proved its value.

Today, payments from insurers and reinsurers are helping people in Australia, New Zealand, Japan, Thailand, Denmark and the United States recover from the catastrophic events of 2011. Over the last decade, insurance has financed the rebuilding of lower Manhattan after the 9/11 tragedy and funded New Orleans’ renaissance from the ill winds of Hurricane Katrina.

However, the value of insurance can be seen each day, not only following a catastrophe. Without insurance, airlines would be grounded, and cars would be banned from the road. Skyscrapers and stadiums could not be built without insurance; homeowners would not be able to take out mortgages. Commerce as we know it would break down.

If insurance did not exist, someone would have to invent it … quickly.

At Catlin, we are proud to be part of the insurance industry. Insurance may not be sexy, but it’s very important. And, providing value to our clients around the world gives us a lot of satisfaction.

About C

atlin

10 Strategic Review

-0.6%

070

Book value per share Dividends per share paid during year

2

6

4

8

10

08 09 10 11

$8.38

$6.61

$7.68$8.34

$7.85

$8.81

$7.05

$8.05$8.74

$8.29

0%

070

2

6

4

8

08 09 10 11

$5.73

$4.63

$5.90$6.53

$6.08

$6.16

$5.07

$6.27$6.93

$6.52

Tangible book value per share Dividends per share paid during year

1.3%/1.7%

07-10

0

20

10

30

40

08 09 10 11

22.9%

-2.8%

24.3%

12.5%

36.1%

-1.9%

33.2%

16.3%

1.3%1.7%

Return on equity Return on net tangible assets

$71m

07-100

100

0

400

200

300

600

500

700

08 09 10 11

$543

-$13

$603

$406

$71


Strategic ReviewKey Performance Indicators

Catlin uses key performance indicators to measure the Group’s performance against its strategic objectives. The Group has selected financial KPIs to measure the creation of shareholder value, shareholder returns and profitability, premium volume, underwriting performance, expense control and investment performance. Non-financial KPIs measure employee retention and claims service performance.

All !nancial KPIs

are relevant to the Group’s compensation

philosophy, and three are explicitly incorporated in the calculations of performance-related pay and employee

share plans.

Book value per share plus dividends US$

Tangible book value per share plus dividends US$

Return on equity/Return on net tangible assets %

Income before income tax US$m

The Group believes that the change in book value per share, plus the common share dividend paid during a calendar year, is an appropriate measure of shareholder value creation. Shareholder value using this metric marginally decreased during 2011. The vesting conditions of Catlin’s Employee Performance Share Plan are based on growth in book value per share plus dividends paid during rolling three- and four-year periods.

Financial Review, page 61; Investor Relations, page 112

Shareholder value can also be measured on a similar basis by combining the annual increase in net tangible value per share with the dividends paid to shareholders during a calendar year. Growth in net tangible assets per share assesses the Group’s performance against its underwriting capital, which excludes goodwill and other intangibles. Measured on this basis, shareholder value was broadly maintained during 2011.

Financial Review, page 61; Investor Relations, page 112

Catlin aims to produce a return on equity that is 10 percentage points above the risk-free rate over an underwriting cycle. Catlin has exceeded this target on a cumulative basis since its IPO in 2004. In 2011 return on equity and return on net tangible assets fell short of this target due to nearly US$700 million in natural catastrophe losses (net of reinsurance and reinstatement premiums).

Chief Executive’s Review, page 14; Financial Review, page 61

Pre-tax pro!tability is an effective measure of the combination of underwriting performance, expense control and investment return. The reduction in pro!ts before tax during 2011 was primarily the result of the impact of the extraordinary series of natural catastrophe losses during the year.

Chief Executive’s Review, page 14; Financial Review, page 61

Note: Pre-2009 book value and dividend amounts have been adjusted for the effect of the Rights Issue in March 2009

11Strategic Review

12.7%

070

5

10

15

20

08 09 10 11

19.7%

14.0%

10.4% 9.8%

12.7%

$3.6bn

070

1,000

2,000

3,000

4,000

08 09 10 11

$2,490 $2,596

$2,918$3,219

$3,612

32.6%

070

10

20

30

40

08 09 10 11

34.1%32.0% 31.5% 32.3% 32.6%

3.1%

07-2

0

2

4

6

08 09 10 11

4.6%

-1.4%

5.9%

2.7%3.1%

70%

070

Attritional loss ratio Loss ratio

10

50

40

30

20

60

70

08 09 10 11

51.0%54.0% 53.7% 51.6% 50.0%

46.4%

62.9%57.6% 57.5%

70.0%

33%

070

10

20

30

40

08 09 10 11

25.0%

Sur

vey

not c

ondu

cted

31.0% 30.0%33.0%


Net premiums earned US$m

Employee turnover %

Expense ratio %

Loss ratio %

Total investment return %

Claims performance %

The Group regards net premiums earned as a relevant indicator of underwriting volume. Net premiums earned increased by 12 per cent in 2011, re"ecting the growth of the Group’s underwriting portfolio outside of the London/UK underwriting hub. At 31 December 2011, the Group had US$2.1 billion of unearned premiums on its balance sheet, a 12 per cent increase from the previous year.

Underwriting Review, page 19;Financial Review, page 61

Catlin seeks to attract and retain high-calibre employees; the employee turnover rate measures the Group’s success in retaining staff members. The employee turnover rate of 12.7 per cent during 2011 is within the Group’s expectations.

Culture/Corporate Responsibility: Workplace, page 49

The expense ratio measures the Group’s policy acquisition costs and operating expenses as a percentage of net premiums earned. The increase in the expense ratio in 2011 is primarily the result of foreign exchange movements when translating sterling-based expenses into US dollars. The expense ratio excludes pro!t-related bonuses, employee share schemes, certain Group corporate costs, investment expenses and !nancing costs.

Financial Review, page 61

The loss ratio measures claims and reserve movements as a percentage of net premiums earned and is a measure of underwriting performance. The attritional loss ratio – which excludes catastrophe and large single-risk losses and reserve movements – is a measure of underlying, longer-term underwriting pro!tability. The loss ratio was in"ated in 2011 by the catastrophe losses, whilst the attritional loss ratio, the lowest in !ve years, re"ects Catlin’s disciplined underwriting.

Underwriting Review, page 19

Total investment return measures investment income plus realised and unrealised gains and losses produced by the Group’s asset portfolio. The total investment return of 3.1 per cent during 2011 is regarded as a good performance and exceeded the Group’s expectations. The performance resulted from the appreciation of the !xed income portfolio as interest rates declined, the Group’s active management of credit and sovereign risk, and the increased duration of the portfolio.

Investments, page 44

Catlin believes that an insurer demonstrates its true worth to a client following a claim. The Group in part measures its claims handling performance through a survey by Gracechurch Consulting, which asks London market brokers which insurer they would highly recommend on the basis of the quality of claims service. In 2011, 33 per cent of brokers highly recommended Catlin, which was 3 percentage points higher than in 2010. Catlin remains the most highly recommended insurer by surveyed brokers.

Culture/Corporate Responsibility: Marketplace, page 48

Strategic R

eview

12 Strategic Review Catlin Group Limited Annual Report and Accounts 2011

Chairman’s StatementGood Performance in a Tough Year

“Catlin ended the year with a solid capital base, which illustrates the emphasis on capital preservation. Our capital base and international infrastructure will allow us to take advantage of the promising underwriting opportunities that are currently arising.”Sir Graham HearneChairman

2011 was a tough year for the insurance industry and for Catlin. A record series of natural catastrophes produced insured losses of more than US$100 billion for the industry. Rate competition adversely affected many classes of insurance and reinsurance. The ongoing economic uncertainty kept interest rates low, reducing many insurers’ investment returns.

Despite these pressures, Catlin performed well. Whilst the Group sustained nearly US$1 billion in gross losses from the natural catastrophes and operated in a challenging investment environment, pro!t before tax amounted to US$71 million, with a return on net tangible assets of 1.7 per cent. I am pleased with the Group’s performance in what was an extraordinarily dif!cult year.

Catlin’s underlying performance was strong. The attritional loss ratio – which excludes the impact of catastrophe losses, large single-risk losses and reserve releases – was the lowest in !ve years. Our 3.1 per cent total investment return was signi!cantly greater than we expected at the start of 2011.

Most importantly, the Group ended the year with a solid capital base. We have also begun to supplement that capital with innovative third-party capital arrangements. This will allow the Group to take advantage of the promising underwriting opportunities that are currently arising in many business classes and to increase premium volume without seeking additional capital from our shareholders. At the same time, we will earn commissions and fees on the business that is underwritten on behalf of the third parties.

Sir Graham HearneChairman

SummaryUS$71 million in pre-tax pro!t despite nearly US$1 billion in gross catastrophe losses in 20116 per cent increase in total dividends per share to 28.0 pence93 per cent total shareholder return since 2004

13Strategic ReviewCatlin Group Limited Annual Report and Accounts 2011

DividendCatlin has increased the dividend it pays to shareholders each year since its initial public offering in 2004. We believe this policy has served shareholders well, although it must be tempered by the incidence and scale of catastrophe losses and the need to preserve capital to take advantage of market opportunities.

The Board of Directors has declared a !nal dividend of 19.0 UK pence (30.2 US cents) per share, payable on 16 March 2012 to shareholders of record on 17 February 2012. Including the interim dividend of 9.0 UK pence (14.7 US cents) per share, the total 2011 dividend of 28.0 UK pence (44.9 US cents) per share represents a 6 per cent increase when compared with the 2010 dividend.

Including the 2011 dividend, the annual dividend payable by Catlin to its shareholders in sterling has increased by 159 per cent since 2004, as shown in Chart 1.

Dividends paid since initial public offering UK pence Chart 1

200720062004 20050

10

20

30

2008 2009 2010 2011

7.0

3.8

10.8 8.8

4.7

13.5

14.9

5.2

20.114.8

7.1

21.915.7

7.5

23.216.8

8.2

25.017.9

8.6

26.519.0

9.0

28.0

Final dividend Interim dividend

Board of DirectorsJean Claude Damerval and Guy Beringer – who have served on the Catlin Board of Directors since 2005 and 2009, respectively – have chosen to retire as Non-Executive Directors following the 2012 Annual General Meeting in May. I would like to express my thanks to Jean Claude and Guy for their service to the Catlin Board and its committees and for their contributions to the Group over the years.

John Barton joined the Board of Directors as a Non-Executive Director in December. John served as Chief Executive of Jardine Insurance Brokers Group for 13 years and later served as Chairman of Jardine Lloyd Thomson Group, the successor company to JIB. He has also served as Chairman of Wellington Underwriting plc and Brit Holdings plc, and is currently Chairman of Next plc.

Conclusion and outlookAs announced at mid-year, I will also step down from the Board following the AGM and, subject to shareholder approval, John Barton will succeed me as Chairman of Catlin. John’s wide experience in both the insurance industry and in other business sectors, especially in the Asia-Paci!c region, makes him well-quali!ed to serve as Catlin’s Chairman. I wish John all the best in his new role.

It has been my privilege to serve as Chairman of the Catlin Group for the past nine years. The Group has changed dramatically during this time, growing from a company with fewer than 200 employees that primarily did business from London to a truly international organisation with nearly 2,000 employees working from 55 of!ces on !ve continents.

During my tenure, the Group successfully completed its initial public offering in 2004. Two years later, Catlin acquired Wellington Underwriting plc, which not only nearly doubled the size of the Group but transformed Catlin into one of the world’s leading specialty insurers and reinsurers. Using the acquisition as a springboard, we expanded our operations throughout Europe, the United States, Canada and the Asia-Paci!c region. That investment is now paying off.

Whilst Catlin is a very different company today than it was when I became Chairman in 2003, the culture and ethos of the Group has not changed signi!cantly. That’s truly remarkable, and I attribute that to the leadership of Stephen Catlin. It has been a great pleasure to work with Stephen and his talented team, and I wish to thank them for all their support and hard work over the years.

Catlin has not only grown in size, but it has signi!cantly increased value for its shareholders since the IPO, despite the tough economic conditions during much of that period. Since 31 March 2004, Catlin has produced total shareholder return amounting to 93 per cent, compared with average total shareholder return of 71 per cent for FTSE 350 companies over that same period.

Total shareholder return 31 March 2004- 31 December 2011 Chart 2

Mar 04 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

80

100

120

140

160

180

200 Catlin +93.0% FTSE 350 +71.2%

What pleases me the most is that I hand over to my successor a business which is well-placed to take advantage of improving market conditions, to continue to grow pro!tably and to increase shareholder value in the future.


Strategic R

eview


Chief Executive’s ReviewFocus on Profitable Growth

“I believe that Catlin today is in a strong position: we have a structure that is capable of substantial, profitable growth at a time when excellent opportunities are arising.”Stephen CatlinChief Executive

In commenting on Catlin’s half-year results, I said that I was con!dent that the unprecedented series of major natural catastrophes during 2011 would be an ‘earnings event’ for Catlin rather than a ‘capital event’.

This has been borne out by events; the Group produced pro!ts before tax in 2011 amounting to US$71 million. This is a good result, considering that Catlin sustained US$961 million of gross catastrophe losses during 2011, 40 per cent of which were incurred during the second half of the year.

Catastrophe losses such as those during 2011 are unusual but not unexpected. In anticipation of such years, we have structured our risk transfer programme, including our Catastrophe Aggregate protection, not to protect our earnings stream, but to ensure that our capital base is not eroded. That was the case during 2011, and producing a pro!t after sustaining nearly US$1 billion in gross catastrophe losses is a good result.

Notwithstanding the catastrophe losses and their impact on our !nancial results, the Group’s underlying performance during 2011 was strong:

Market conditions are improving. Rates for Property Treaty Reinsurance and other catastrophe-exposed classes increased during 2011 following the series of catastrophe events. At 1 January 2012 renewals, rates for non-correlated business classes began showing signs of improvement. Whilst it may be too early to declare that the market has turned, nearly all signals are encouraging.


SummaryCatlin’s strategy performed well during 2011Rates for catastrophe-exposed business classes are rising signi!cantlyCatlin will not sacri!ce pro!ts for top-line growthThird-party capital agreements offer signi!cant bene!ts to Catlin and its shareholders


Our international platform for growth is in place. Gross premiums written increased by 11 per cent in 2011, with nearly all of that increase produced by our non-London/UK underwriting hubs. Our investment in these hubs over the past decade continues to bear fruit, allowing us to expand our distribution outside of the London wholesale market. We believe there is signi!cant potential for further growth, no matter what the market conditions.This growth has been profitable. The Group’s attritional loss ratio was the lowest in !ve years, an excellent achievement considering the competitive conditions for most non-catastrophe classes of business during 2011. The non-London/UK underwriting hubs generated 48 per cent of gross premium volume and produced 45 per cent of underwriting contribution if catastrophe losses are not taken into account. However, we are not sacri!cing loss ratio for top-line growth.

I believe that Catlin today is in a strong position: we have a structure that is capable of substantial, pro!table growth at a time when excellent opportunities are arising.

2011 performanceNet income to common shareholders amounted to US$38 million (2010: US$337 million). The return on net tangible assets amounted to 1.7 per cent (2010: 16.3 per cent), whilst return on equity was 1.3 per cent (2010: 12.5 per cent).

The catastrophe losses signi!cantly reduced the Group’s pro!ts in 2011, but Catlin has met its target to provide returns that exceed the risk-free rate by 10 percentage points over the course of an underwriting cycle. Since the Group’s initial public offering in 2004, Catlin’s average return on net tangible assets has amounted to 17.1 per cent, and average return on equity was 13.4 per cent. By comparison, the average risk-free rate (as measured by 12-month US dollar Libor) was 2.9 per cent. During this period, the insurance industry has suffered three of the worst catastrophe years on record.

Chart 1 tracks Catlin’s annual compounded performance against the adjusted risk-free rate.

Compounded return on net tangible assets 2004-2011 Chart 1

20112010200920082007200620052004

Cumulative Catlin RoNTA* Cumulative 12-month US dollar Libor +10%

240%

200%

160%

120%

80%

40%

0%

21.8%2.2%

28.2%

36.1% -2.8%

33.2%

16.3%1.7%

Average risk-free rate plus 10% during period: 12.9%Average Catlin RoE (US dollars) during period: 13.4%Average Catlin RoNTA (US dollars) during period: 17.1%

* Percentages shown in chart refer to RoNTA in a given year

StrategyThe Group has a simple strategy based upon:

underwriting discipline;diversi!cation, by both geography and business class;an emphasis on capital preservation and "exibility; anda corporate culture based on !ve core values: transparency, accountability, teamwork, integrity and dignity.

Underwriting disciplineCatlin’s underlying underwriting performance during 2011 was strong. The attritional loss ratio – a benchmark that excludes the impact of catastrophe losses, large single-risk losses and reserve releases – was 50.0 per cent, a reduction from 51.6 per cent in 2010 and the lowest in !ve years (see Chart 2).

Attritional loss ratio 2007-2011 Chart 2

20112010200920082007

51.0%

54.0%53.7%

51.6%

50.0%

55.0%

47.5%

45.0%

50.0%

52.5%

This performance was achieved during a year when the Group increased premium volume in a dif!cult pricing environment for many classes of business. Over the years, we have assembled an excellent team of underwriters and provided them with sophisticated pricing and portfolio management tools.

Overall, the Group’s underwriting contribution amounted to US$324 million (2010: US$684 million), a favourable result considering the level of catastrophe losses in 2011.

The Group released US$103 million from prior year loss reserves during 2011 (2010: US$144 million), an amount equal to 2 per cent of opening reserves (2010: 3 per cent). The 2011 reserve release continues Catlin’s track record of consistent reserve releases (see Chart 3).

Prior year reserve releases 2007-2011 US$m Chart 3

20112010200920082007

$103

$144

$94

$118

$139

$160

$120

$0

$40

$80

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DiversificationIn parallel with our commitment to disciplined underwriting, the Group focuses on the diversi!cation of our risk portfolio.

Catlin has invested over the past decade in our operations outside the United Kingdom. Our investment is producing pro!table growth that the Group would be unable to achieve if it had not diversi!ed beyond the London wholesale market. Our infrastructure is scalable to take advantage of opportunities as they arise.

Gross premiums written by the Group’s underwriting hubs in Bermuda, the United States, the Asia-Paci!c region, Europe and Canada increased by 24 per cent in 2011, compared with the 1 per cent increase in the London/UK hub’s volume. The non-London/UK hubs now account for 48 per cent of the Group’s gross premiums written.

The catastrophe losses had an adverse impact on the underwriting contribution produced by the non-London/UK hubs in 2011, especially the Bermuda and Asia-Paci!c hubs. However, if the impact of the catastrophe losses is excluded, the non-London/UK hubs produced a signi!cant proportion – 45 per cent – of the Group’s total underwriting contribution (see Chart 4).

Gross premiums written and underwriting contribution by business segment US$m Chart 4


$515

48% $549 $852

$2,342 52%

$770

Underwriting contribution

74%

26%-$66 $115

$241

$34

Underwriting contribution (excluding catastrophe losses)

55%

45% $189 $142

$553

$118

0 500 1,000 1,500 2,000 2,500

-100 0 100 200 300

0 100 200 300 400 500 600

London Bermuda

US International

London Bermuda

US International

London Bermuda

US International

Note: The International reporting segment includes the Asia-Paci!c, Europe and Canada underwriting hubs

Gross premiums written by the Europe hub increased by 55 per cent to US$354 million (2010: US$229 million), which re"ects Catlin Re Switzerland’s successful !rst year of operations. Not only did our new European-based reinsurance operation underwrite more than US$140 million in new business and achieve pro!tability targets in 2011, it added signi!cantly to the diversi!cation of the Group’s underwriting portfolio. Catlin Re Switzerland underwrites property/casualty classes of reinsurance for European clients, a sector in which Catlin previously had a small market share. In addition, it writes a book of Credit and Political Risk reinsurance for a global client base, business which is largely uncorrelated with catastrophe coverages.

Capital preservation and flexibilityCatlin’s emphasis on capital preservation – including the Group’s Catastrophe Aggregate programme – was demonstrated during 2011. Not only did the Group report a pro!t during a year of extraordinary catastrophe activity, we have maintained a solid capital base that will allow Catlin to take advantage of emerging underwriting opportunities.

The Catastrophe Aggregate programme protects the Group against the frequency and severity of catastrophe events in major catastrophe zones. The programme is structured to reduce capital volatility caused by catastrophe losses over the course of a calendar year. The programme contains aggregate deductibles that are eroded by catastrophe activity, and recovery is much more likely in the second half of any year.

The 2011 Catastrophe Aggregate programme responded to the catastrophe losses as we had expected. Whilst 60 per cent of gross catastrophe losses were sustained by the Group in the !rst half of 2011, meaningful recoveries did not begin until the second half, as shown in Chart 5.

2011 gross and net catastrophe losses US$m Chart 5

31 Dec30 Jun

Gross catastrophe losses (year to date) Net catastrophe losses (after reinsurance recoveries and reinstatement premiums)

$1,000

$800

$600

$400

$200

$0

$574

$534

$961

$678

Pro!tability built steadily during 2011 and the recoveries from the Catastrophe Aggregate programme had a signi!cant impact on the Group’s pro!t before tax when measured on a quarterly basis (see Chart 6).

Chief Executive’s Review continued


2011 profit before tax by quarter US$m Chart 6

-$300

-$150

$0

$150 $152$120

$72

-$273

Q1 Q2 Q3 Q4

The 2012 Catastrophe Aggregate protection is substantially similar to the 2011 programme, although there have been some changes dictated by market conditions. Limits remain from the 2011 protection to mitigate adverse development of losses arising from the 2011 catastrophes.

One of Catlin’s competitive advantages is the "exibility of our capital structure, which allows the Group to allocate capital to those regions and classes of business that offer the best pro!t potential.

We have increased our capital "exibility for 2012 and beyond by forming strategic partnerships with third-party capital providers. These arrangements provide a modest capital bene!t for 2012, allowing Catlin to increase its premium volume and providing a foundation to expand third-party capital in future years should new, pro!table growth opportunities warrant.

Three Special Purpose Syndicates at Lloyd’s have been established by third-party capital providers to underwrite whole-account quota share reinsurance of the Catlin Syndicate. Catlin will manage the syndicates on behalf of the capital providers. In addition, the Group has purchased an Adverse Development Cover that, subject to limits, provides protection against the deterioration of loss reserves relating to the Group’s 2009 and prior underwriting years.

We believe that these arrangements offer real bene!ts to Catlin and its shareholders by allowing the Group to take advantage of new opportunities, thereby improving the quality of earnings for existing shareholders. The Special Purpose Syndicates will produce fees and commissions payable to the Group, whilst the Adverse Development Cover is a prudent way to reduce the risk of prior-year reserve deterioration.

We are especially pleased with our partnership with China Reinsurance (Group) Corporation, which is sponsoring one of the Special Purpose Syndicates. The syndicate represents the !rst direct investment by a Chinese entity in the Lloyd’s market. This partnership with China Re will allow Catlin to expand its knowledge of insurance and reinsurance practices in China, allowing us to increase our presence in a rapidly growing marketplace. In return, the alliance will help China Re gain a better knowledge of Lloyd’s and will increase China Re’s presence in the international reinsurance market. As part of the relationship, China Re employees will work from Catlin’s London of!ces as secondees.

Catlin’s investment strategy aims to maximise economic value whilst minimising downside risk to capital and controlling earnings volatility. Investment performance was good during 2011, producing a total investment return of 3.1 per cent (2010: 2.7 per cent). Total investment return increased 21 per cent to US$256 million, (2010: US$212 million).

Investment return primarily bene!tted from the appreciation of the !xed income portfolio as interest rates declined, as well as the active management of credit and sovereign risk within the !xed income portfolio.

The Catlin CultureI believe that a major reason for Catlin’s success is our corporate culture. This culture empowers Catlin employees to act to the best of their abilities and reinforces the partnerships that must exist between our employees and clients, brokers and shareholders.

Catlin has been recognised for high standards of service to brokers and clients, which I believe is a direct product of our culture. Our London underwriting and claims teams have both received top rankings in independent surveys of brokers. We aim to apply those standards to our operations worldwide.

Just as we have a responsibility to our clients and our shareholders, Catlin takes seriously its responsibility to the communities in which we operate. These efforts range from our global projects such as the Catlin Arctic Survey, which helps scientists gather facts to better understand how our environment is changing, to initiatives sponsored by local of!ces to provide better opportunities to children and young people. Our community responsibility efforts in London were recognised last year when Catlin received a prestigious Dragon Award from the Lord Mayor of London for our efforts to help improve a local secondary school.

I am proud of our employees, whose hard work in a dif!cult year has again resulted in a positive performance by the Group. I sincerely thank them for their efforts, and look forward to working with them to take advantage of the excellent opportunities that exist for Catlin.

I would also like to take this opportunity to thank Sir Graham Hearne, who will step down in May as the Group’s Chairman following the Annual General Meeting. The contributions that Sir Graham has made to Catlin during the past nine years are far too many to count or describe in detail. It has been my great privilege and a source of signi!cant enrichment to serve under him during this period of rapid growth and evolution. I wish Sir Graham well in his future endeavours.

We at Catlin have been building a business for the future ever since the Group was established in 1984. Despite a tough year in 2011, our future has never been brighter.


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“We stress teamwork at Catlin because we are much stronger as underwriters when we make decisions together, not independently.”Alain BurguiereHead of AerospaceParis

Alain BurguiereHead of Aerospace

FunctionUnderwriting

HubEurope

OfficeParis

BirthplaceMillau, France

Joined Catlin2007

What I DoAlain Burguiere

Catlin is one of the world’s leading Aerospace insurers, and my job is to co-ordinate the activities of our Aerospace underwriting teams located in London and Europe. What I enjoy most is leading people to realise their abilities, helping them become the best in their class.


Underwriting ReviewStrong Underlying Performance

Catlin produced good underwriting results in a year of exceptional natural catastrophe activity

The combination of a strong underlying underwriting performance and the response of the Group’s outwards reinsurance programme to the unprecedented series of catastrophe losses during 2011 enabled Catlin to produce US$324 million of underwriting contribution, a good result considering the market environment.

The attritional loss ratio of 50.0 per cent (2010: 51.6 per cent), which excludes the impact of catastrophe and large single-risk losses and reserve releases, was the lowest in !ve years. This result further highlights the bene!ts of Catlin’s ongoing strategy of disciplined underwriting, international geographical distribution and a commitment to technical excellence.

The Group’s own catastrophe loss experience during 2011 was in line with its catastrophe threat scenarios. The impact on the Group’s pro!ts from the catastrophe losses has been diluted due to Catlin’s diversi!ed underwriting portfolio and its prudent approach to the use of reinsurance.

The Group believes that its ongoing strategy leaves it well-positioned for 2012 and beyond, irrespective of market conditions.

Market reviewLoss experience2011 was an historic year for natural catastrophe losses. Aon Ben!eld reports that 253 ‘signi!cant events’ caused US$435 billion of economic losses, making it the costliest year ever on this basis. In context, Munich Re believes that economic losses from natural catastrophes are 46 per cent greater than during 2005, the previous record year.

SummaryUS$324 million in underwriting contributionUS$678 million in net catastrophe losses50 per cent attritional loss ratio11 per cent increase in gross premiums written; 24 per cent increase by non-London/UK hubs

In terms of insured losses, Aon Ben!eld reports that 2011 produced natural catastrophe losses of US$107 billion, making it the second costliest year on record after 2005, a year in which the US$113 billion in insured losses included those from Hurricane Katrina and several other Atlantic hurricanes. If losses from the 2011 catastrophes – in particular those from the Thai "oods – deteriorate further, 2011 could become the costliest year ever for insured losses (see Table 1).

Fatalities arising from 2011 catastrophe events totalled more than 27,000, with almost 16,000 deaths alone arising from March’s Tohoku earthquake and subsequent tsunami in Japan. Despite the tragic loss of life, Munich Re reports that the number of catastrophe-related fatalities during 2011 was less than in previous years. An average of 106,000 people died annually as a result of natural catastrophes between 2001 and 2010, and 296,000 people died as a result of catastrophes during 2010, mostly due to the Haitian earthquake. Fatalities and insured damage arising from natural catastrophes are not necessarily linked. The 26 December 2004 Indian Ocean tsunami claimed more than 200,000 lives, but caused relatively modest insured damage.

Approximately 55 per cent of the insured losses came from three events: the Japanese earthquake/tsunami; earthquakes in Christchurch, New Zealand; and the severe "ooding in Thailand during the second half of the year.

The most signi!cant event of 2011 – both in terms of fatalities and insured losses – was the Tohoku earthquake. The 9.0Mw magnitude earthquake struck on 11 March with an epicentre some 40 miles east of Tohoku. The subsequent tsunami !rst made landfall at Miyako less than an hour later. Although this was the strongest Japanese quake ever recorded, it was the subsequent tsunami that caused the greatest damage to Japan’s eastern seaboard, with surge waters reaching as far as 6 miles inland.

Whilst economic losses have been estimated in the region of US$210 billion, insured losses are currently estimated at approximately US$35 billion.

The second largest insured loss was the ‘New Zealand II’ earthquake which struck Christchurch in February. It was the second in a series of signi!cant earthquakes in the same region within nine months. The 6.3Mw earthquake caused 182 fatalities and US$30 billion of insured losses.

The most catastrophic weather-related event during 2011 was the extensive "ooding in Thailand in the second half of the year, most signi!cantly in the Chao Phraya and Mekong River basins. Persistent monsoon rains and an active cyclone season resulted in the worst "ooding in Thailand for 50 years. Houses, farmland and industrial estates were damaged, costing an estimated US$45 billion in economic losses. It is estimated that at least US$11 billion of these losses were insured, but some observers believe the !nal cost of the Thai "oods could easily exceed US$15 billion.

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The remainder of insured catastrophe losses arose primarily from severe weather events. Despite just one US hurricane landfall (Hurricane Irene), signi!cant losses were incurred in the United States, driven largely by the deadliest and most costly tornado season ever. Total insured losses arising from US thunderstorms and tornadoes in 2011 amounted to approximately US$26 billion, with the loss of more than 550 lives (see Chart 2).

The single deadliest tornado occurred during May in Joplin, Missouri, where a single storm claimed more than 150 lives and caused more than US$2 billion of insured damage. This was both the deadliest and costliest tornado to touch down in the United States for more than 50 years.

Despite seeing a slightly above average number of named storms during 2011, the US windstorm season only generated three major Atlantic hurricanes, of which only one made US landfall. During August Hurricane Irene travelled across the Caribbean before reaching the coast of North Carolina and then moving northwards to New York, New England and Canada. Despite reaching the New York area as only a Category 1 storm, Irene caused US$9 billion of economic losses, with wind and "ood damage causing insured losses of around US$5 billion.

Insured US thunderstorm/tornado losses 1990-2011 US$bn Chart 2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

$0 $5 $10 $15 $20 $25 $30

Source: Munich Re

Underwriting Review continued

Ten largest insured natural hazard events in 2011 Table 1

Date Event LocationEstimated

fatalities

Estimated structure

claims

Estimated economic loss

(US$bn)

Estimated insured loss

(US$bn)

11 March Earthquake Japan 15,844 1,100,000 210 35

22 February Earthquake New Zealand 182 156,313 30 14

25 July-30 November Flooding Thailand 790 4,000,000 45 11

22-28 April Severe weather, tornadoes US (Southeast, Great Plains, Midwest)

344 700,000 10 7

21-27 May Severe weather, tornadoes US (Great Plains, Midwest, Southeast)

181 750,000 9 7

22-30 August Hurricane Irene US, Canada, Bahamas, Caribbean Islands

46 835,000 9 5

21 December 2010-14 January 2011 Flooding Australia (Queensland) 36 58,463 30 2

3-5 April Severe weather US (Midwest, Southeast, Great Plains)

9 225,000 3 2

13 June Earthquake New Zealand 1 53,963 30 2

14-16 April Severe weather US (Great Plains, Southwest, Midwest)

48 150,000 3 2

All other events 87 21

Total 466 107

Source: Aon Ben!eld


Other losses to note during 2011 were:

"ooding in and near Brisbane, Australia, during January;the landfall of Cyclone Yasi in Queensland, Australia, also during January; andsigni!cant "ooding in Copenhagen in July following a violent cloudburst which saw the equivalent of two months of rain fall during a two-hour period.

PricingAverage weighted premium rates across the Group’s underwriting portfolio increased by 2 per cent during 2011 (2010: 1 per cent decrease). Average weighted premium rates increased by 4 per cent for catastrophe-exposed classes but were "at for non-catastrophe classes.

Chart 3 shows rate movements across all classes of business, as well as for catastrophe-exposed and non-catastrophe classes, since 1999.

Rating indexes for catastrophe and non-catastrophe business classes 1999-2011 Chart 3

2011201020092008200720062005200420032002200120001999

Catastrophe classes Non-catastrophe classes All classes

300%

250%

200%

150%

100%

Rating index base = 100 in 1999

Following the catastrophe events in January through May, pricing for catastrophe-impacted lines increased at the key 1 June and 1 July renewal dates. The Property Treaty Excess of Loss Reinsurance programmes renewed at an average weighted rate increase of approximately 14 per cent. When combined with the "at to marginal rate decreases seen for these programmes earlier in the year, Property Treaty Excess of Loss pricing increased by a weighted average of approximately 6 per cent for the full year, with all catastrophe-exposed business classes increasing 4 per cent in the aggregate.

The International and US Direct and Facultative Property classes, written by the London and international of!ces, saw signi!cant rate increases on loss impacted accounts, rising by 10 per cent and 4 per cent, respectively, for the full year. In addition, the Group’s Energy account saw some pricing corrections primarily driven by the renewal of loss-impacted accounts; the average aggregate rate increase was 4 per cent.

Chart 4 shows aggregate rate movements for Catlin’s six product groups – Aerospace, Casualty, Energy/Marine, Property, Reinsurance and Specialty/War & Political Risk – since 1 January 1999.

Rating indexes for product groups 1999-2011 Chart 4

2011201020092008200720062005200420032002200120001999

Aerospace Casualty Energy/Marine

Property Reinsurance Specialty/War and Political Risk

300%

250%

200%

150%

100%

Rating index base: 100 per cent in 1999

Average weighted rate movements by product group for the past two years are shown in Chart 5.

Average weighted premium rate movements by product group 2010-2011 Chart 5

2010 2011

4%

2%

-2%

-4%

-6%

0%

-3%

0%

1%

-1%

-5%

2%

3%

-2%

2% 2%

-1%

-4%

Specialty/War and

Political Risk

ReinsurancePropertyEnergy/Marine

CasualtyAerospace

Aerospace classes of business continued to suffer from continued competition following another relatively benign loss year for the Aviation industry. This suggests that there could likely be further pressure on rates during 2012.

Overall, average weighted rates for Casualty classes increased marginally during 2011. This was primarily due to the impact of the Group’s Motor portfolio, for which rates increased by approximately 11 per cent in line with wider market conditions. On average, rates for most Casualty classes either decreased slightly or remained "at. However, there were indications of some upward rating pressure.

Aggregate rates for Specialty/War & Political Risks classes of business continued to decrease. Benign loss experience in Terrorism and Credit business classes also resulted in downwards rate pressure. In addition, the Credit account suffered from the in"ux of new capacity that followed rate increases in the aftermath of the 2008 credit crisis.

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Gross premiums writtenGross premiums written by the Group increased by 11 per cent to US$4.5 billion during 2011 (2010: US$4.1 billion).

As in recent years, the bulk of this growth was produced by Catlin’s underwriting hubs in Bermuda, the United States, the Asia-Paci!c region, Europe and Canada. Gross premiums written by the non-London/UK hubs increased by 24 per cent. The non-London/UK hubs accounted for 48 per cent of the Group’s 2011 gross premiums written (2010: 43 per cent), demonstrating the Group’s investment in its international infrastructure and these hubs’ ability to grow organically.

Chart 6 illustrates the gross premiums written by !nancial reporting segment – London/UK, Bermuda, US and International – for the past six years.

Gross premiums written by financial reporting segment 2007-2011 US$m Chart 6

20112010200920082007

5,000

4,000

3,000

1,000

0

2,000

$2,605

London Bermuda

US International

$2,428 $2,347 $2,323 $2,342

$312$392 $421 $502 $549

$297 $348 $581$707

$852$147 $269$366

$537

$770

$3,361 $3,437$3,715

$4,069

$4,513

In recent years gross premiums written by the London/UK hub have decreased primarily due to increasing competition for London wholesale business and Catlin’s underwriting discipline. However, the London/UK hub’s volume increased by 1 per cent during 2011, primarily driven by rate increases in loss-impacted classes (such as Property Treaty Excess of Loss Reinsurance), reinstatement premiums and the development of new opportunities in classes with improving pricing, such as Motor. However, rates continued to decrease in some classes of London wholesale business, notably Aerospace classes.

The Bermuda hub produced a 9 per cent increase in gross premiums written. This increase was driven in part by improved pricing and terms during mid-year Property Treaty renewals, the impact of loss-triggered reinstatement premiums, the purchase of back-up policies and growth in Agricultural Reinsurance, a global Catlin specialty.

The 21 per cent growth in gross premiums written by the US hub was driven in part by the Miami of!ce, which was established in 2010 to develop Treaty Reinsurance business in Central and South America as well as further Agricultural reinsurance opportunities. In addition, growth was produced by a new Energy underwriting team in Philadelphia as well as opportunistic growth in niche and specialist Casualty lines.

The International reporting segment includes the Asia-Paci!c, Europe and Canada underwriting hubs. The proportion of the International segment’s gross premiums written attributable to each of these hubs is shown in Chart 7.

Gross premiums written by international underwriting hubs 2007-2011 US$m Chart 7

20112010200920082007

800

700

600

500

400

100

200

0

300

$67

Asia-Paci!c

$105$129

$217

$304

$39

$111

$175

$229

$354

$41

$53

$62

$91

$112

$147

$269

$366

$537

$770 Europe Canada

Gross premiums written by the Asia-Paci!c hub increased by 40 per cent during 2011, with particularly strong growth in Australia and China. The hub expanded its regional Property Treaty Reinsurance capabilities during the year, which places the hub in a good position to take advantage in 2012 of the improvements in rates and conditions for Property Treaties following the catastrophe events in the region.

The largest increase in gross premiums written – 55 per cent – was reported by the Europe underwriting hub. The growth was partly due to the establishment of Catlin Re Switzerland, which began underwriting with effect from 1 January 2011. The European Reinsurance operation achieved both premium and pro!tability targets during its !rst year of operations.

Gross premiums written by the Canada underwriting hub increased by 23 per cent. This growth was the result of several factors, including a full year of operations by the Montreal and Vancouver of!ces, which were established in late 2010.

Underwriting performanceUnsurprisingly, as a result of the catastrophe events of 2011, the Group’s loss ratio increased to 70.0 per cent (2010: 57.5 per cent). However, Catlin’s underlying underwriting performance, as measured by the attritional loss ratio, was strong. Overall, the Group produced a net underwriting contribution of US$324 million (2010: US$683 million), despite incurring nearly US$1 billion in gross catastrophe losses.

An analysis of the components of the loss ratio in 2011 and 2010 is shown in Chart 8.



Components of loss ratio 2010-2011 Chart 8

70

60

40

30

50

-4.5%

51.6%

7.2%

3.2%

57.5%

Lossratio

Reserverelease

Largesingle-risk

losses

Catastrophelosses

Attritionallossratio

-2.8%

50.0%

1.5%

70.0%

Lossratio

Reserverelease

Largesingle-risk

losses

2010 2011

Catastrophelosses

Attritionallossratio

21.3%

The attritional loss ratio – which excludes catastrophe and large single-risk losses and releases from prior year reserves – decreased to 50.0 per cent in 2011 (2010: 51.6 per cent), the lowest in the past !ve years. The reduction in the attritional loss ratio illustrates the "exibility of Catlin’s underwriting portfolio, as the Group has moved away from classes of business that have performed poorly and added new classes to further diversify the portfolio. The Group regards this as a signi!cant achievement considering the prevailing market conditions and the overall increase in premium volume.

Catastrophe losses, net of reinstatement premiums and reinsurance recoveries, including the Group’s Catastrophe Aggregate protections, amounted to US$678 million (2010: US$218 million). Gross losses from catastrophes occurring during 2011 amounted to US$961 million. The catastrophe events added 21.3 percentage points to the Group’s 2011 loss ratio (2010: 7.2 percentage points).

The Group’s outwards reinsurance programme performed as expected, reducing the second-half impact of the catastrophe losses to US$144 million. Limits remain to mitigate any foreseeable loss deterioration from the 2011 catastrophe events.

Large single-risk losses amounted to US$54 million net of reinsurance and reinstatement premiums (2010: US$98 million) and added 1.5 percentage points to the loss ratio during 2011 (2010: 3.2 percentage points).

Large single-risk losses are de!ned as losses arising from man-made causes that exceed expected severity for a given class of business, typically in excess of US$10 million, gross of reinsurance. The Group sustained three large single-risk losses during 2011:

an explosion and !re at a re!nery in Alberta, Canada, in January;damage to a "oating energy production storage vessel located in the North Sea in February; andthe loss of a satellite that failed to reach proper orbit in August.

Whilst large-single risk losses during 2011 were lower than in the past several years, the Group does not believe this constitutes the start of a trend.

The Group released US$103 million from prior year loss reserves during 2011 (2010: US$144 million), equivalent to 2 per cent of opening reserves (2010: 3 per cent). The prior year reserve release reduced the 2011 loss ratio by 2.8 percentage points (2010: 4.5 percentage points).

The underwriting performance by each of the Group’s reporting segments is analysed in Table 9.

Underwriting performance by hub 2010-2011 US$m Table 9

London/UK Bermuda US International Group

2011

Gross premiums written 2,342 549 852 770 4,513

Net premiums written 1,916 502 726 691 3,835

Net premiums earned 1,891 471 636 614 3,612

Underwriting contribution 241 (66) 115 34 324

Loss ratio 65.1% 92.4% 63.5% 74.9% 70.0%

Attritional loss ratio 47.5% 32.8% 59.6% 60.8% 50.0%

2010

Gross premiums written 2,323 502 707 537 4,069

Net premiums written 1,830 438 572 478 3,318

Net premiums earned 1,827 427 538 427 3,219

Underwriting contribution 366 151 95 71 683

Loss ratio 57.6% 41.5% 64.8% 64.2% 57.5%


The catastrophe losses sustained during 2011 had a signi!cant impact on the loss ratio and underwriting contribution of the London/UK and Bermuda underwriting hubs, both of which write a signi!cant proportion of the Group’s Property Treaty Reinsurance portfolio. The Asia-Paci!c underwriting hub, part of the International reporting segment, also incurred sizable catastrophe claims.

The most signi!cant reduction in the attritional loss ratio came in the London/UK hub. The attritional loss ratio for the US reporting segment also improved, which further demonstrated Catlin’s underwriting discipline during a year in which market conditions were competitive for most non-catastrophe classes of business.

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Gross written premiums by product group 2010-2011 US$m Chart 10

2011

Specialty/War and Political Risk Product Group

2010

$410

$420

$199

$245

$121

$92

$78

$64

$12

$19

2011

Reinsurance Product Group

2010

$1,593

$1,289

$781

$659

$365

$293

$119

$105

$181

$167

$147

$65

2011

Property Product Group

2010

$515

$471

$308

$256

$106

$113

$101

$102

2011

Energy/Marine Product Group

2010

$689

$607

$213

$191

$140

$147

$125

$105

$70

$73

$87

$63

$54

$28

2011

Casualty Product Group

2010

$923

$842

$326

$316

$379

$391

$83

$87

$135

$48

2011

Aerospace Product Group

2010

$396

$440

$352

$400

$44

$40

Downstream Energy Energy Liability

War and Political Risks, Terrorism and Credit

Accident & Health Equine/Livestock

Contingency

Non-Proportional Property Proportional Property

Marine Casualty

Specialty

International US

Binding Authorities

Upstream Energy Hull

Cargo Specie

General Casualty Professional/Financial

Marine Motor

Aviation Satellite


Product groupsCatlin writes most classes of commercial insurance and reinsurance through its six product groups. The gross premiums written in the major categories within each product group are shown in Chart 10. The underwriting performance for each product group is shown in Table 11.

Catlin continued to carefully manage its Aerospace portfolio due to the continuation of challenging market conditions for these classes of business. Gross Aerospace premiums written were reduced by 10 per cent, primarily driven by the non-renewal of Airline and General Aviation accounts with insuf!cient rate adequacy. This reduction in volume was linked to an increase in underwriting contribution produced by the Aerospace account, which re"ected both market loss experience and Catlin’s focus on its core book of business.

The Group has continued to focus the Casualty portfolio on specialty and niche retail classes of business for which pricing is more stable. Gross Casualty premiums written increased by 10 per cent, primarily driven by the development of the Group’s Short-Tail Motor account.

Long-Tail Casualty business has increased modestly through selective growth outside the London wholesale market in areas where the Group saw adequate margins. This growth broadly offset further reductions in the London wholesale book.

The proactive management of the Casualty portfolio has resulted in a reduction in the Casualty loss ratio to 78 per cent (2010: 87 per cent) and underwriting contribution of US$27 million (2010: US$13 million underwriting loss), despite some prior year reserve strengthening.

This restructuring of the Casualty portfolio over the past several years and the development of the Group’s infrastructure outside the London wholesale market leaves Catlin well-positioned to take advantage of the inevitable market turn in the Casualty market.

Gross premiums written by the Energy/Marine product group increased by 14 per cent, primarily due to growth in international Offshore and Onshore Energy business, as well as the development of a US Energy Liability team. Marine volume grew modestly, with growth in Cargo and US Marine business offset by small decreases in Hull and Specie volumes.

The Energy/Marine product group’s loss ratio increased to 64 per cent (2010: 55 per cent). Despite the impact of the Deepwater Horizon explosion, the Energy loss ratio in 2010 was positively impacted by a larger than average prior year reserve release, skewing the comparison with 2011. Underwriting contribution decreased by 41 per cent to US$54 million (2010: US$92 million). Despite a slight increase in underlying loss ratios, Energy and Marine margins remain adequate, and these classes continue to develop as global products for the Group.

Property Insurance premiums increased by 9 per cent. The growth was the result of the expansion of London/UK and International Binding Authority business, growth in the Construction account and – later in the year – the !rst signs of rate increases for Property Insurance accounts following the series of natural catastrophes.

Not surprisingly, insurance claims arising from those catastrophes caused the Property product group’s underwriting contribution to decrease by 27 per cent to US$53 million (2010: US$73 million). The Property loss ratio rose to 58 per cent (2010: 51 per cent).

The bulk of the Group’s natural catastrophe losses in 2011 were incurred in the Reinsurance product group, which produced a negative underwriting contribution of US$75 million (2010: US$303 million underwriting contribution). The Reinsurance product group’s loss ratio rose to 87 per cent (2010: 52 per cent).


The 24 per cent increase in Reinsurance gross premiums written was attributable to several factors, including signi!cant reinstatement premiums paid by cedants following catastrophe events. Also contributing to the increased volume were growth in Agricultural Reinsurance premiums, the establishment of Catlin Re Switzerland and growth in the Casualty Treaty Reinsurance account, particularly by the US underwriting hub where a newly established team is gaining traction.

Specialty/War & Political Risk volumes have remained broadly static year on year, due to the offsetting effects of an increase in Specialty volume and a decrease in War/Political Risk premiums.

The Group’s Specialty business has continued to grow, in particular the Accident & Health portfolio and niche Aquaculture business. Conversely, War/Political Risk volume has decreased due to continued overcapacity in the Terrorism and Credit Insurance markets. The overall reduction in these classes has been partially offset by the continued and successful development of related products, such as Product Recall, Piracy and Kidnap & Ransom.

The loss ratio for the Specialty/War & Political Risk portfolio improved slightly to 32 per cent (2010: 36 per cent), generating a 15 per cent increase in underwriting contribution to US$180 million (2010: US$156 million). Despite the overcapacity for Terrorism and Credit coverage, the overall result demonstrates the adequacy of pricing and conditions for many Specialty business classes as well as selective underwriting in classes which were impacted by the global !nancial crisis.

1 January 2012 renewal experienceAverage weighted premium rates across Catlin’s underwriting portfolio increased by 5 per cent for 1 January 2012 renewals. Rates for catastrophe-exposed classes rose by a weighted average of 9 per cent, whilst rates for non-catastrophe classes increased by 1 per cent.

Rate movements at 1 January 2012 by product group are shown in Chart 12.

Rate movements by product group at 1 January 2011 and 2012 Chart 12

4

2

8

6

-2

0

1%

2%

-1%

0%

3% 3%

7%

0%

2%

3%

1%

-2%

1 January 2011 1 January 2012

Specialty/War &

Political Risk

ReinsurancePropertyEnergy/Marine

CasualtyAerospace

Pricing for catastrophe classes was particularly strong at 1 January 2012, although positive signs were seen across a large number of non-correlated classes of business.

Average weighted premium rates for Reinsurance classes, the largest component of the 1 January renewals, increased by 7 per cent, largely driven by Property Treaty Excess of Loss business. With the exception of Europe, rates increased for Property Treaty business across all regions, with rates for loss-impacted regions, especially Asia-Paci!c, showing the greatest increase. European renewals remained broadly "at, with the impact of new catastrophe model releases balanced by relatively benign loss experience. Overall, rates for US Property Treaty Excess of Loss Reinsurance increased by an average of 17 per cent, whilst average rates for non-US Property Treaty classes rose by 12 per cent.

Rates in the Property product group increased for both International and US Direct and Facultative portfolios, as direct property classes start to follow the higher rates charged for reinsurance classes.

Underwriting results by product group 2010-2011* US$m Table 11

Gross premiums

written

Net premiums

written

Net premiums

earnedUnderwriting contribution

Loss ratio

Rate change

2011

Aerospace 396 315 338 101 51% (5%)

Casualty 923 720 687 27 78% 2%

Energy/Marine 689 518 482 54 64% 2%

Property 515 428 404 53 58% 2%

Reinsurance 1,593 1,506 1,332 (75) 87% 3%

Specialty/War & Political Risks 410 367 387 180 32% (2%)

2010

Aerospace 440 348 405 70 61% (3%)

Casualty 842 651 647 (13) 87% 0%

Energy/Marine 607 464 447 92 55% 1%

Property 471 379 371 73 51% (1%)

Reinsurance 1,289 1,102 1,043 303 52% (1%)

Specialty/War & Political Risk 420 406 355 156 36% (4%)

* Product group data excludes effect of claims handling costs, bad debt charges and Syndicate 2020 movements

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Following some major restructuring over the past years, the Group’s Casualty portfolio is well-positioned for a market correction. The UK Motor market has responded to poor performance with sizeable rate increases during the past 24 months. The UK Motor portfolio is continuing to grow as the Group expands its existing Motor Fleet portfolio and continues to develop a relationship with ‘Insure the Box’, a niche personal lines auto insurer on behalf of which Catlin provides underwriting capacity and in which Catlin has a 25 per cent shareholding. Rates for the remainder of the Casualty portfolio are broadly "at, with small increases for some Professional Lines accounts.

The Group anticipates that momentum will continue to build across Catlin’s underwriting portfolio throughout 2012, as signi!cant additional pricing increases will be required to offset the impact of reduced investment yields.

The global economic outlook remains uncertain, highlighted by the European sovereign debt crisis. This will affect Catlin as the majority of our business is underwritten in developed nations where economic growth is lagging. Aside from these economic concerns, a change is emerging in the traditional world order, as the in"uence and !nancial power of emerging or newly emerged economies create both threats and opportunities for established markets. These trends underscore Catlin’s strategy to increase business in these markets through its international network of of!ces.

Further creation of winners and losers in the property/casualty insurance industry, especially in the bottom quartile, is likely to lead to more business moving among insurers. This trend will increase the importance of underwriting fundamentals, such as distribution and technical excellence, that form the basis of Catlin’s underwriting culture.

Despite the uncertainties faced by the industry, Catlin believes it is well-positioned for the next 12 months and beyond. The Group’s international infrastructure is in place, has the capacity to respond when change occurs and is capable of producing further pro!table growth, independent of market conditions. Our portfolio "exibility, both in terms of product and geography, can further enhance returns at this phase of the underwriting cycle.

Although pricing is mixed across the Casualty portfolio, rates continued to increase for the Short-Tail Motor account, for which some business renewed at 1 January.

Rates also increased for Aerospace classes, a sector which has experienced rate softening since 2002. However, the Group’s 1 January 2012 renewals were dominated by one large account which was re-engineered for 2012.

Rates increased for all other product groups, although it should be noted that the 1 January renewal season is of less signi!cance to non-reinsurance classes.

Gross premiums written as at 31 January 2012 increased by approximately 10 per cent, which met the Group’s expectations.

There is signi!cant uncertainty regarding the losses arising from the grounding of the cruise ship Costa Concordia on 13 January 2012. Catlin currently estimates that its losses will amount to approximately US$35 million, net of reinsurance.

OutlookCatlin is pleased with the marginally positive rate movements across non-catastrophe classes at 1 January 2012. Whilst these rate increases do not constitute a hard market, there is a growing sense that momentum for positive rate changes is building. This opinion is increasingly supported by external commentators.

The Group has seen rate increases for catastrophe classes, which we expect to continue at major renewal dates during 2012. More modest rate increases are likely for underlying insurance classes, most notably Property. The marketplace is changing, but it is not a changed marketplace.

The Thai "ooding in the second half of 2011 is the !rst truly major insured Southeast Asian catastrophe claim. It will be interesting to see how the market responds to some of the challenges that a loss of this size brings.



DistributionA Distinctive Catlin Advantage

The Group’s international network of offices diversifies its book of business

Catlin’s distinctive distribution model is a cornerstone of Catlin’s operating strategy. Our six underwriting hubs, located in the world’s major insurance markets, provide the Group with the ability to underwrite a geographic- and product-diverse portfolio. Information about the Group’s six underwriting hubs appears on pages 30 to 35.

Catlin more than a decade ago began to build its international distribution network, rather than relying solely on wholesale business placed in the London market. Catlin established of!ces in Singapore and Kuala Lumpur in 1999, followed by the acquisition later that year of a US underwriting agency with of!ces in Houston and New Orleans. Twelve years later, Catlin operates 55 of!ces in 21 countries worldwide.

This model allows Catlin to underwrite specialty insurance and reinsurance business that would normally not be placed in the London wholesale market, which adds diversity to the portfolio by both geographic region and business class. Pricing for this business is not as volatile as for London wholesale business. Catlin’s distribution model also allows the Group to form closer relationships with assureds and their brokers worldwide, which aids business retention.

The Group believes that its well-developed global structure constitutes a signi!cant competitive advantage in today’s increasingly global marketplace.

The vast majority of the business that Catlin underwrites is produced by hundreds of retail and wholesale brokers worldwide, including specialty and regional brokerages. Catlin aims to establish close and long-lasting relationships with its brokers through its reputation for underwriting excellence and superior claims service. More information on Catlin’s service initiatives appears on page 48. A breakdown of Catlin’s ten largest brokers based on percentage of the Group’s 2011 gross premiums placed by each appears in Chart 1.

SummaryCatlin operates 55 of!ces in 21 countriesTen brokers produce two-thirds of Catlin’s premium volumeWriting business through coverholders provides Catlin with access to quality business

Percentage of gross premiums written produced by largest brokers in 2011 Chart 1

NMB Holdings

Price Forbes

Arthur J Gallagher

RK Harrison

Towers Watson

Miller

JLT

Willis

Marsh

Aon 19%

19%

11%

6%

2%

2%

2%

2%

1%1%

The !ve largest brokers accounted for nearly 60 per cent of 2011 gross premiums written, and the top ten produced approximately two-thirds of the Group’s premium volume.

Binding authorities and third-party coverholdersCatlin delegates underwriting authority for speci!c classes of business to third-party ‘coverholders’ under standard market contractual agreements. A coverholder is typically a wholesale insurance agent dealing in a variety of classes of local business, but niche brokers are also occasionally used as coverholders.

Writing business through carefully selected coverholders provides Catlin with access to quality business, often smaller to medium-size risks which would ordinarily be uneconomical to underwrite. The business underwritten by coverholders increases the diversity of Catlin’s risk portfolio by business class and geographic location. It also provides a further source of operational leverage.

Catlin is considered as a leader in the Lloyd’s and UK binding authority business, particularly with regard to US-based surplus lines property binding authorities. The Catlin Syndicate and Catlin UK had 965 binding authority agreements in place during 2011 (2010: 1,002).

Catlin US writes binding authority business, particularly from its of!ce in Scottsdale, Arizona. In addition, Catlin US’s general aviation portfolio is underwritten under a binding authority by W. Brown & Associates Insurance Services, a California-based underwriting agent.

Binding authorities require careful management. Catlin places great emphasis on the selection, management and monitoring of its coverholders, and specialist employees in London, the United States, Germany and Australia oversee and review current and prospective coverholders. The primary goal is to ensure that all coverholders underwriting business on behalf of Catlin comply with the Group’s rigorous processes and controls. In addition, Catlin makes sure that its own interests are aligned with those of its coverholders, so that all parties are focused on maximising underwriting pro!tability.

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Our Underwriting HubsBroad and Profitable Distribution

During the past decade, Catlin has built a distinctive international infrastructure, composed of six underwriting hubs. Today, our 55 offices in 21 countries provide Catlin with a scalable distribution network that has proved capable of providing profitable growth in all phases of an underwriting cycle.

Canada

Catlin Canada has become an increasingly important participant in the Canadian property/casualty insurance market.


US$112 millionEmployees Of!ces

74 4

US

The Group’s second-largest underwriting hub, Catlin US writes a broad range of insurance and reinsurance products nationwide.



404 19

Our Underwriting Hubs

Approach Six underwriting hubs covering the world’s

major insurance markets Each hub acts as a local insurer whilst

retaining Catlin’s strategy and distinctive corporate culture

Advantages Source of solid, profitable growth in all phases

of the underwriting cycle Allows Catlin to underwrite business not

usually placed in the London wholesale market Pricing is often not as volatile as London

wholesale business Adds diversity to the Group’s portfolio by both

geographic region and business class Gives Catlin access to markets where the

Group can increase its market share Provides an opportunity to form closer

relationships with clients and brokers, which aids business retention


“Premium volume written by our non-London/UK hubs has increased by more than 30 per cent on a compound annual basis over the past five years. These hubs now produce meaningful profits for Catlin.”Stephen CatlinChief Executive

Bermuda

Catlin Bermuda specialises in writing an international book of property treaty reinsurance as well as other business classes.



67 1*

London/UK

The London/UK hub includes Catlin’s London wholesale portfolio as well as insurance written by UK regional of!ces.


US$2.34 billionEmployees Of!ces

857 9

Europe

Catlin’s established European insurance operations are now complemented by a growing reinsurance portfolio.



197 14

Asia-Pacific

The Group underwrites a broad range of insurance and reinsurance classes from of!ces in Asia and Australia.



228 8

* Does not include Guernsey branch

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New emphasis placed on broker service and niche classes

SummaryGross premiums written: US$2.34 billionGrowth in 2011 GPW: 1%Of!ces: 9Employees: 857

London/UK

Losses arising from catastrophe events and continued competition for many classes of wholesale business made 2011 a tough year for Catlin’s London/UK underwriting hub.

Gross premiums written by the London/UK hub increased by 1 per cent during 2011 to US$2.34 billion (2010: US$2.32 billion). The hub continued to reduce business volumes in certain wholesale business classes in the light of sustained market competition – such as Aviation and non-Motor Casualty business – but volume overall was increased by rising rates for Property Catastrophe treaties and reinstatement premiums paid in the catastrophes’ aftermath.

In the light of the market conditions, the London/UK hub emphasised niche classes of business, such as Cargo, Product Recall, Kidnap & Ransom, Accident & Health and Bloodstock. During 2011 Catlin formed a new Kidnap & Ransom team with a specialisation in marine piracy risks that has become a market leader.

Catlin’s size and position have helped it maintain pro!t margins during the competitive stage of the market cycle. The Catlin Syndicate is the largest at Lloyd’s in terms of premium capacity, which serves to attract brokers and clients. Seventy-seven per cent of surveyed London brokers said they placed business with Catlin in 2011, 11 per cent greater than the second-ranked underwriter. Catlin’s position as a market leader also allows it to determine rates and conditions that other underwriters follow.

The hub’s goal is to deliver value to brokers and clients through long-term relationships supported by excellent underwriting and claims service. According to independent surveys, Catlin is highly regarded by London brokers: Catlin’s London underwriting teams were ranked !rst by brokers in areas such as !nancial strength, technical capability, integrity and trustworthiness, and commitment to excellent customer service. Catlin’s claims service was the most recommended in the market and also ranked !rst for building good relationships with brokers.

Besides the wholesale business largely written by the Catlin Syndicate at Lloyd’s, the London/UK hub also writes coverage for

“It is crucial that our underwriters and claims professionals provide tangible value to brokers and their clients by delivering the highest-quality service. Brokers have appreciated the efforts we have made, and this will give us a competitive advantage in the long term.”

Nick Sinfield Chief Executive Officer

In Focus: Meeting Brokers’ Needs As nearly all of Catlin’s business is produced by brokers, it pays for an insurer to make their lives easier. So, in 2011 Catlin introduced a comprehensive programme to improve radically the service offered to brokers working in the London market.

The cornerstones of the initiative were to improve brokers’ access to Catlin’s underwriters and to extend broking hours to

make it more convenient to place business. Claims staff focused on going the extra mile for brokers and clients following a claim.

The initiative was successful: Catlin is now rated by London brokers as best in class for underwriter availability and commitment to service, while the Claims team was praised for building good relationships with brokers.

UK commercial clients through Catlin UK, the Group’s UK-domiciled insurance carrier. During 2011, Catlin UK launched two product ranges aimed speci!cally at UK regional brokers. Catlin Select offers broad, bespoke coverage designed to provide custom insurance solutions. Catlin Online utilises an electronic trading facility that enables brokers to quote and bind online a range of coverages designed speci!cally for UK-based SME clients.

$2.34bn

Gross premiums written US$bn

Besides London,Catlin’s UK of!ces

are located in Birmingham, Colchester,

Glasgow, Guernsey, Hitchin, Ipswich, Leeds

and Tonbridge.

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$502$549


Underwriting results substantially impacted by catastrophe losses

SummaryGross premiums written: US$549 millionGrowth in 2011 GPW: 9%Of!ces: 1*

Employees: 67

* Not including Guernsey branch

Bermuda

Claims from the unprecedented number of international catastrophe losses during 2011 had a signi!cant impact on Catlin Bermuda’s performance.

The Bermuda underwriting hub, whose single largest class of business is Property Catastrophe reinsurance, recorded a 9 per cent increase in gross premiums written to US$549 million, (2010: US$502 million). Much of the growth was produced by reinstatement premiums paid by ceding companies following loss activity.

Inevitably, the catastrophe losses caused Catlin Bermuda’s loss ratio to increase to 92.4 per cent (2010: 41.5 per cent) and resulted in a negative underwriting contribution of US$66 million (2010: US$151 million underwriting contribution). This 2011 result was to be expected given the nature of Catlin Bermuda’s portfolio which produces strong pro!ts in low-catastrophe years. In the past, Catlin Bermuda has produced loss ratios of 40 per cent or less in catastrophe-benign years.

Whilst rates for Property Treaty reinsurance increased during the year as the catastrophe losses mounted, the Casualty Treaty reinsurance marketplace remained competitive. Casualty Treaty reinsurance is Catlin Bermuda’s second-largest class of business, with a particular focus on medical and professional lines where the rating environment was stubbornly "at.

Catlin Bermuda continued to develop its book of agriculture reinsurance, which has signi!cant growth potential. The hub’s Political Risk, Terrorism and Trade Credit insurance portfolios also increased in importance.

Catlin Bermuda also provides reinsurance capacity for Structured Risk, Marine & Aviation and Life, Accident & Health lines, the last of which is written by its Guernsey Branch with a focus on international clients based in the Middle and Far East. The Guernsey Branch also underwrites General Aviation reinsurance.

“Catlin Bermuda’s fortunes will always depend largely on catastrophe loss experience. 2011 was a tough year, but we believe we are well-positioned to take advantage of improving rates and conditions.”

Graham Pewter Chief Executive Officer

In Focus: Back to School for Clients In 2011 Catlin Bermuda found an innovative way to solidify relationships with key clients: send them to school.

The !rst ‘Catlin College’ was attended by ten professionals from important US-based clients. The programme, devised by Catlin Bermuda managers, offered clients an insight into how reinsurance – and Catlin Bermuda – really works.

The College attracted a mixture of executives from ceding companies. Over two days, they attended ten presentations led by members of the Catlin Bermuda team, ranging from the fundamentals of reinsurance to more advanced

subjects like capital and portfolio management. As their !nal exercise, the ‘students’ became insurance company CEOs and participated in a specially designed computer-based game requiring them to choose from a variety of underwriting and reinsurance strategies, then allowing them to review the resulting pro!ts or losses.

The College received very positive feedback from attendees, who emphasised that their experience had clearly differentiated Catlin from the competition. The Catlin College will become a recurring feature of the hub’s client development activities.

$549m

Gross premiums written US$m

Catlin Bermuda

writes Property, Casualty, Agricultural,

Marine & Aviation, A&H/Life, Political Risk/

Terrorism, Trade Credit and Structured Risk classes of

business.

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$581

$707

$852


Underwriting contribution increases along with broker, client awareness

SummaryGross premiums written: US$852 millionGrowth in 2011 GPW: 21%Of!ces: 19Employees: 404

US

Catlin US continues to build a diversi!ed book of specialty insurance and reinsurance business and increase awareness of the Catlin brand among US brokers and clients.

Gross premiums written by Catlin US increased by 21 per cent to US$852 million (2010: US$707 million), the product of Catlin’s investment in the recruitment of experienced and disciplined US underwriters and the establishment of 17 of!ces nationwide.

Despite ongoing competitive market conditions for most classes of US business during 2011 and losses arising from the series of tornadoes that devastated portions of the Midwest and South, Catlin US’s loss ratio decreased during the year to 63.5 per cent (2010: 64.8 per cent). Underwriting contribution rose by 21 per cent to US$115 million (2010: US$95 million).

Catlin US’s business mix continues to be approximately 60 per cent insurance and 40 per cent reinsurance.

Within the insurance segment, the US hub increased its focus on short-tail classes of business during 2011 while reducing long-tail casualty volumes, in keeping with the Group’s overall underwriting strategy. During the year, Catlin US expanded its Marine underwriting team. In the reinsurance segment, which is largely property-oriented, the hub focused on expanding its Property Treaty portfolio in both the United States and Latin America.

Catlin US writes coverage on behalf of three Catlin-owned, US-domiciled insurance carriers: Catlin Insurance Company Inc. and Catlin Indemnity Company, which are admitted insurers, and Catlin Specialty Insurance Company, which writes on a non-admitted basis. Catlin Indemnity was purchased in January 2011 as a shell company, and its addition gives Catlin US additional "exibility when writing admitted business. Catlin US underwriters can also write business on behalf of the Catlin Syndicate at Lloyd’s or Catlin UK, depending on broker and client preference.

Over the past !ve years, Catlin US has recruited a pool of experienced underwriting talent and continues to selectively add expertise. As a result of its strategic investment in personnel as well

“Catlin US has over the past five years built a profitable, well-balanced book of business. Our operation is scalable, and we have the capability to increase our portfolio of business significantly when market conditions in the United States improve.”

Richard S. Banas Chief Executive Officer

In Focus: Latin American Opportunities During 2011, responsibility for the Latin American market was consolidated within Catlin US.

During the year, Catlin implemented a comprehensive strategy for cautiously expanding its Latin American reinsurance portfolio, including transferring oversight for the Group’s existing of!ces in São Paulo and Bogotá to staff located in the Miami of!ce. In addition, Catlin US has established specialist teams to underwrite Latin American business.

The Latin American market presents signi!cant opportunities for Catlin. Latin American economies are expected to grow much more rapidly than the global average over the next !ve years. The demand for insurance is expected to increase steadily for many reasons, including the growing energy market in Latin America, ongoing infrastructure projects and the emergence of substantial international companies based in the region.

as infrastructure, Catlin US has the resources in place to continue to increase volume signi!cantly as and when market conditions harden.

$852m


Catlin US is headquartered in

Atlanta and operates 16 other of!ces nationwide.

Catlin US is also responsible for Catlin’s Latin American of!ces located in São Paulo

and Bogotá.

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Focus on people helps build Catlin’s profile across region


Asia-Pacific

Investments in both geographical expansion and personnel by Catlin’s Asia-Paci!c underwriting hub paid off in 2011 as Catlin’s pro!le and reputation in the region continued to grow.

Catlin Asia-Paci!c faced increased challenges during the year. In particular, the catastrophe events that occurred in the Asia-Paci!c region during 2011 – the Japanese earthquake/tsunami, earthquakes in Christchurch, New Zealand, and "ooding in Australia and Thailand – had a signi!cant impact on the hub’s results and those of the International !nancial reporting segment, which includes the Asia-Paci!c hub. However, these events are creating new underwriting opportunities, including a re-adjustment of pricing for many classes of business within the region.

Gross premiums written by Catlin Asia-Paci!c increased by 40 per cent to US$304 million (2010: US$217 million). This growth was driven by the depth of the underwriting talent that Catlin has nurtured across the region as well as the increased diversi!cation of classes underwritten in the Asia-Paci!c region. Growth was particularly substantial in Australia, China and across South East Asia.

The hub during 2011 further enhanced its Property Treaty underwriting expertise, with key hires in Australia, Shanghai and Singapore. The timing was prudent as treaty terms and conditions are improving in the region following the catastrophes of 2011. Catlin Asia-Paci!c also began marketing Marine Piracy coverage, which has been well-received by shipping companies in the region and has led to meaningful amounts of new business, as well as leading to other opportunities in associated classes.

Despite the growth in 2011, underwriters in the hub turned away inadequately priced new and renewal business, maintaining a constant focus on pro!tability. This bottom line focus has been a drawing card to attract top-quality talent, in a region with a shortage of experienced underwriting staff.

Catlin’s !rst of!ce outside London was established in Singapore in 1999. During the past year, Catlin moved into a new of!ce in

“We remain very committed to growing our own talent. We feel that the Catlin culture is now recognised across the Asia-Pacific market, and we have become a regional employer of choice.”

Mark Newman Chief Executive Officer

Singapore which, along with new facilities in Melbourne, provides a strong message to clients, brokers and employees regarding Catlin’s continued commitment to the region.

$304m


Catlin Asia-Paci!c

has underwriting of!ces in Singapore,

Hong Kong, Melbourne, Sydney and Shanghai and representative of!ces in

Mumbai and Tokyo. Catlin’s shared services of!ce

is located in Kuala Lumpur.

In Focus: Attracting Quality Employees One of the toughest challenges for international insurers operating in the Asia-Paci!c region is !nding quality employees in an area in which there is a serious shortage of experienced talent.

One of the major successes of 2011 for Catlin’s Asia-Paci!c hub has been its ability to continue to attract great people across all functions, to support its ambition to become a leading player in the regional insurance/reinsurance market. Many of

the new hires came to Catlin from larger, well-respected competitors and bring with them both signi!cant experience and established relationships with brokers and clients in the region.

In addition to attracting top-quality talent, the hub has also further reduced the staff turnover rate throughout its of!ces, which will help increase Catlin’s reputation and market share in the years ahead.

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Insurance, reinsurance units provide strong growth in competitive marketplace

Summary• Grosspremiumswritten:US$354 million• Growthin2011GPW:55%• Offices:14• Employees:197

Europe

Catlin’soperationsinEuropewerecomplementedin2011bythelaunchofCatlinReSwitzerland,theGroup’sSwiss-basedreinsurancecompany.GrossinsuranceandreinsurancepremiumswrittenbytheEuropeanhubin2011increasedby55percenttoUS$354million(2010:US$229million),fuelledbygrowthininsurancevolumeandthenewreinsuranceoperations.

Insurance operationsCatlinEurope’sinsuranceoperations,whichareheadquarteredinCologne,continuetogrowintermsofvolumeandprofitabilityasaresultoftheinvestmentmadebyCatlininEuropeoverthepasteightyears.Whilstpremiumvolumeincreased,growthwascarefullymonitoredinrecognitionofthecompetitiveconditionsformostclassesofEuropeanbusiness.

Thefocusduring2011wasprimarilyonorganicgrowth,buildingonthefoundationthathadbeenestablishedwhentheCologneofficewasopenedin2003.CatlinnowhasinsuranceunderwritingstaffinnineEuropeancountriesandwritesabroadrangeofbusinessclasses,fromAquaculturetoPersonalAccident.

Twonewinsuranceunderwritingofficeshavebeenformed.AnofficeinRotterdamwasestablishedinlate2011,whichcurrentlywritesConstructionbusiness;theofficeplanstobeginwritingLiabilityinsurancein2012.AnofficewasopenedinViennainJanuary2012,complementingtheexistingInnsbruckoffice,writingConstruction,LiabilityandMarineinsurance.

Reinsurance operationsCatlinReSwitzerlandhassuccessfullyincreasedanddiversifiedCatlin’sEuropeanportfolio,withnewbusinesstoCatlinaccountingformorethan80percentofthevolumewrittenbyCatlin’sEuropeanreinsuranceoperationsin2011.

Thecompanypursuesamultilinereinsuranceapproach:itunderwritesalllinesofbusinessinpropertyandcasualtyreinsuranceforEuropeanclients.Inaddition,itwritesCreditandSuretyreinsuranceonaglobalbasis.

“Catlin Europe is in a good position to continue its profitable growth from the foundation that we have created during the past eight years.”

Ralf Tillenburg Chief Executive Officer – European Insurance

“Catlin Re Switzerland’s efforts in 2011 to build relationships and increase awareness puts us in a strong position to grow business further during 2012.”

Peter Schmidt Chief Executive Officer – European Reinsurance

In Focus: Building a New CompanyCatlinReSwitzerlandisnowanintegralpartoftheCatlinGroup.ItsformationwasannouncedinJune2010.Athree-personexecutivestaff,headedbyPeterSchmidt,wasrecruitedshortlythereafter.Inlate2010thecompanyreceiveditsreinsurancelicencefromtheSwissregulatorFINMA.

InitsfirstyearinbusinessCatlinReSwitzerlanddefined

itspositioningasamultilinereinsurer,builtupthestafftounderwritealllinesofproperty/casualtybusinessandestablisheditsfootprintwithkeyclientsandincoremarkets,layingthefoundationforasteadybusinessexpansiongoingforward.Today,besidesitsheadquartersinZurich,Catlin’sEuropeanreinsuranceunderwritersarebasedinRome,CologneandMadrid.

SimilartotheEuropeaninsuranceoperation,CatlinReSwitzerlandfollowsacautiousgrowthstrategy,buildingasolidclientbasewhileensuringthatbusinesswrittenmeetsCatlin’sstandardsforrateadequacy.Itaimstoestablishlong-termrelationshipswithitsclients,rootedinsuperiorexpertiseinreinsurance,astrongcapitalbaseandrating,andasolidunderstandingofitsclients’markets.

$354m


In2011-12CatlinhasopenedofficesinRotterdam

andViennaspecialisingininsuranceandinMadridspecialising

inreinsurance.

35Strategic Review

070

50

100

150

08 09 10 11

$41$53

$62

$91

$112


Increasing influence in local marketplace through expansion


Canada

Catlin Canada is the smallest of the Group’s six underwriting hubs in terms of premium volume, but it is increasingly becoming an important player in the Canadian specialty insurance/ reinsurance marketplace.

The hub recorded another year of double-digit growth in gross premiums written, with volume increasing by 23 per cent to US$112 million (2010: US$91 million). Whilst gross premiums written by Catlin Canada has increased by more than nearly 175 per cent during the past !ve years, market conditions in Canada has been competitive for most classes of business and Catlin Canada – in line with the Group’s strategy – has focused on pro!table underwriting rather than simply top-line growth.

Contributing to the increase in 2011 gross premiums written were full-year contributions from of!ces established in Montreal and Vancouver in the latter part of 2010, which brought the number of Catlin of!ces in Canada to four. In addition, Catlin Canada during 2011 bene!tted from the increased resource invested in the Energy, Construction and Casualty areas together with growth from the Reinsurance product line which was introduced late in the previous year.

Catlin Canada, which was established in 2004, writes Aerospace, Casualty, Construction, Energy, Property and Specialty (Livestock, Equine and Product Recall) classes of insurance. It is also growing in importance as a provider of Property, Casualty and Agricultural reinsurance capacity to Canadian insurers.

The hub commenced writing Energy Liability business during 2011 through its Calgary of!ce. In addition, a new Machinery Breakdown insurance programme was introduced on a national basis on behalf of a major broker through which Catlin Canada provided a simple solution to the broker’s high-volume portfolio.

Catlin Canada also continues to increase its penetration in Eastern Canada and with regional brokers through targeted marketing efforts, including an increasing number of events hosted by Catlin in the brokers’ own of!ces. These efforts have been well-received.

“Catlin Canada has continued to strengthen its staff and systems throughout the organisation, and we are now poised to take advantage of any upturn the Canadian market may experience as a result of the 2011 losses that hit the global insurance industry.”

Michael Hansen Chief Executive Officer

In Focus: Ready for Rate ImprovementsCatlin Canada was established in 2004 and has steadily built an infrastructure to serve commercial clients across Canada. During 2011, the Canadian hub focused on integrating new of!ces in Montreal and Vancouver which were established late in 2010 and the development of an internal underwriting system that provides end-to-end support

for the business, from quoting through policy production.

The new of!ces and more ef!cient processes put Catlin Canada in an advantageous position to continue to grow pro!tably at a time when rate reductions in the Canadian market have largely ended and improvements in market conditions appear to on the horizon.

$112m


Catlin Canada has grown

from a singleof!ce in Toronto to

an insurer operating throughout Canada with

of!ces in Calgary, Montreal andVancouver.

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Capital Preservation and FlexibilitySolid Base on Which to Grow

Catlin seeks to preserve capital with an efficient and flexible structure

Catlin strives to maintain an ef!cient level of economic capital with a strong focus on capital preservation consistent with the Group’s risk appetite and current business plan.

Catlin controls downside risk to capital created by its diversi!ed portfolio of underwriting and !nancial markets risk to ensure that the Group and all of its insurance carriers can bene!t from the improved pricing environment in years following signi!cant market events without necessarily raising additional capital. The delivery of this strategy is supported by a robust risk and control framework.

Catlin’s risk appetite is a function of expected pro!t and available capital. In setting risk appetite it is recognised that there will be a trade-off between expected pro!t, risk to capital and the time horizon under consideration across risk categories (such as underwriting risk, reserving risk, !nancial markets risk, credit risk and operational risk).

One of Catlin’s key aims is consistency and transparency of risk management and control across the entire Group, its insurance carriers and all risk categories (see page 40).

Catlin controls its exposure via:

a diversi!ed portfolio of underwriting and !nancial markets risks;restricting aggregation;exercising controls on key risks; andrisk mitigation of key underwriting and !nancial markets risks.

Catlin’s rated underwriting entities have been assigned !nancial strength ratings of ‘A’ (Excellent) by A.M. Best and ‘A’ (Strong) by Standard & Poor’s. These superior ratings re"ect these agencies’ con!dence in the Group’s risk management framework and level of capital. Standard & Poor’s has also rated Catlin’s Enterprise Risk Management programme as ‘Strong’.

SummaryCapital buffer at 31 December equalled 14 per cent of economic capital requirementIntroduction of third-party capital bene!ts Group and its shareholdersRisk transfer programme includes catastrophe aggregate protection

CapitalThe Group’s capital position is analysed in Table 1. Catlin believes that its capital position at 31 December 2011 is suf!cient to mitigate the risk of the necessity to raise further capital following two 1-in-100-year insurance events. This would allow the Group to bene!t from the improved pricing environment in such a scenario in subsequent years without necessarily raising capital.

Capital position US$m Table 1

2011 2010

Paid-up capital (net of intangibles) 2,099 2,236

Preferred shares 590 590

Capital available for underwriting1 2,689 2,826

Economic capital requirement2 2,362 2,349

Capital buffer to economic capital requirement 327 477

Capital buffer as % of economic capital requirement 14% 20%

1 At 31 December 2011 the Group also had US$91 million (2010: US$93 million) in subordinated debt that is available to pay losses if required. The subordinated debt is not re"ected in the available capital shown in the table.

2 Economic capital represents management’s view of the capital required to operate the business, based on the Group’s internal model.

Efficient and flexible capital structureThe Group has developed a structure designed for capital ef!ciency, including "exible allocation of available capital. Capital is managed and allocated on a Group basis.

Catlin Bermuda (Catlin Insurance Company Ltd.), in addition to writing third-party business, serves as the parent company of Catlin’s other regulated insurance entities. The Group operates through only a small number of insurance carriers: as many as necessary, as few as possible. Financial resources are pooled at the parent level for the bene!t of the entire Group. This allows Catlin to allocate capital quickly and easily to where it is best used and provide funds to where they are needed.

This simple structure, illustrated in Chart 2, is a signi!cant competitive advantage for Catlin when compared with other international insurance groups which sometimes operate through numerous local, separately capitalised insurance carriers, which hinders the rapid reallocation of capital.


Capital structure promotes efficiency Chart 2

Catlin GroupLimited

Catlin Bermuda

BermudaBranch

Catlin Syndicatesat Lloyd’s

CatlinUK

Catlin ReSwitzerland

Catlin US*

* Catlin US includes Catlin Insurance Company Inc., Catlin Specialty Insurance Company Inc. and Catlin Indemnity Company

Besides Catlin Bermuda, Catlin owns and operates the Catlin Syndicate (Syndicate 2003) and a separate life syndicate (Syndicate 3002) at Lloyd’s, which underwrite coverage on a global basis by leveraging Lloyd’s international licences. Other Catlin insurance carriers – Catlin Re Switzerland, Catlin UK and three insurers operated by Catlin US – !ll geographic and policyholder needs. Catlin Re Switzerland also underwrites through its branch in Bermuda.

Shareholder’s equity forms the backbone of the Group’s capitalisation, complemented by the Group’s non-cumulative perpetual preferred shares. The preferred shares are a capital instrument which is eligible as regulatory capital for Catlin Bermuda. At the same time, Catlin’s centrally managed outwards reinsurance/risk transfer programme reduces volatility and further enhances overall capital ef!ciency.

Sophisticated capital modelling techniques are used to assess and allocate capital throughout the Group. Catlin’s own view of capital requirements is complemented by regulatory and rating agency perspectives. Ultimately, capital is deployed in regions and classes of business where growth and value creation can be delivered to our shareholders over the long term.

We also supplement our own capital with third-party capital as market circumstances change. This adds "exibility to the Group’s capital structure.

Third-party capitalThe Group has put in place for 2012 a number of strategic third-party capital arrangements. Our "exible capital structure has allowed us to easily introduce these arrangements, which the Group believes bene!ts both Catlin and the counterparties.

Three Special Purpose Syndicates have been established at Lloyd’s for 2012 that provide whole-account quota share reinsurance to the Catlin Syndicate 2003. These agreements could be expanded in subsequent years by mutual agreement depending upon market circumstances.

The Special Purpose Syndicates are shown in Table 3.

Special Purpose Syndicates providing third-party capital in 2012 Table 3

Syndicate number Counterparty Syndicate capacity

2088 China Reinsurance (Group) Corporation £50 million6111 Lloyd’s Names £60 million6112 Everest Reinsurance Company £27 million

The Group has also purchased an Adverse Development Cover that provides protection against the deterioration, subject to limits, of loss reserves relating to the Group’s 2009 and prior underwriting years. The purchase of this coverage does not represent a change in the Group’s reserving philosophy, but rather is intended to improve the ef!ciency of the Group’s capital. If surplus emerges from reserves, the Group will bene!t through a pro!t commission arrangement.

The third-party capital arrangements bene!t the Group in several ways, including by:

increasing book value through fees for management expenses and commissions for pro!table underwriting;providing the Group with the "exibility to respond quickly to changing market circumstances, such as advantageous market conditions following a signi!cant catastrophe event;reducing total volatility of earnings for Catlin’s capital relative to business volumes;more ef!cient capital provision, particularly through the adverse development cover;allowing the use of Catlin’s capital for greater development of the Group’s underwriting portfolio; andfacilitating the transfer of knowledge between the Group and participating counterparties in areas of mutual bene!t.

The Group holds suf!cient capital to achieve the business plan for 2012 without the third-party capital arrangements. However, these arrangements have been instigated at a modest level to improve the Group’s strategic options, increase the "exibility of the capital structure and lay the foundation for greater use when market circumstances warrant. These arrangements improve the Group’s ability to react to changes in the market in a timely fashion for the bene!t of shareholders.

Catlin continues to explore potential third-party capital arrangements and additional transactions could be made during 2012.

Regulatory requirementsCatlin is committed to full compliance with local regulatory and capital requirements in all relevant jurisdictions in which we operate.

Catlin is working with the Association of Bermuda Insurers and Reinsurers as the Bermuda Monetary Authority (‘BMA’) progresses to an enhanced risk-based capital approach.

Catlin-managed syndicates at Lloyd’s and Catlin UK (Catlin Insurance Company (UK) Ltd.) will be subject to the proposed Solvency II regulatory framework, although the date of implementation remains unclear. Work is in progress to meet these requirements. As part of this work, Catlin is actively participating in market working groups whose goals are to ensure compliance with the new regulatory regime when it is launched.

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Reinsurance and risk transferThe goals of Catlin’s risk transfer programme are to reduce volatility with a focus on capital preservation and "exibility following major events or signi!cant market corrections. The programme is viewed as a capital management tool and is designed and executed centrally in order to maximise effectiveness.

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 for claims.

The key elements of the risk transfer programme include:

risk transfer to capital markets and/or collateralised counterparties to diversify and improve counterparty !nancial security particularly for infrequent catastrophe or extreme loss scenarios;non-proportional event and aggregate protection to reduce the impact of large and/or more frequent signi!cant events;proportional and facultative protection to enhance the Group’s gross underwriting capacity and cycle management; andconsideration of the quality of security and willingness to pay.

Under the current risk transfer programme, recoveries are generally more likely in the second half of any calendar year as the programme is structured to reduce volatility of a full calendar year. Although some protection is purchased against single events, the core of the current programme is deliberately structured to protect the Group against an aggregation of signi!cant catastrophe losses (with a focus on natural perils) from major zones. Once the aggregate of losses to the Group reaches a certain level, a signi!cant portion of further losses are recoverable from the programme up to certain limits.

This is best illustrated by the performance of the reinsurance programme during 2011 when there were a signi!cant number of catastrophic events. Chart 4 shows the cumulative progression of the gross and net of reinsurance !nancial impact to the Group of the series of major catastrophe events during 2011.

Gross and net catastrophe losses by reporting period US$m Chart 4

31 Dec30 Jun

Gross catastrophe losses (year to date) Net catastrophe losses (after reinsurance recoveries and reinstatement premiums)

$1,000

$800

$600

$400

$200

$0

$574

$534

$961

$678

Only a small amount of reinsurance recoveries were made during the !rst half as underlying deductibles on the Group’s Catastrophe Aggregate programme were still being eroded. As further losses emerged during the fourth quarter, the gross impact to the Group deteriorated but recoveries from the Catastrophe Aggregate programme increased signi!cantly as the underlying deductibles were substantially exhausted.

The Catastrophe Aggregate programme in 2012 is structured similarly but not identically to the 2011 programme. The increased cost of the 2012 programme is largely offset by the increased underlying rates on the original business covered.

The core risk transfer programme structure is reviewed at least annually and could change materially in future years. The actual structure will depend on market availability and a consideration of the cost and bene!ts afforded by the programme.

The Group evaluates the !nancial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All reinsurers on our current programme have !nancial strength rating of at least ‘A’ from Standard and Poor’s or ‘A-’ from A.M. Best at the time of placement, or provide appropriate collateral.

The Group actively considers and monitors the insurance- linked securities market and may sponsor such transactions when appropriate.

The Group believes that its risk transfer philosophy maximises book value growth over time by retaining expected earnings volatility and transferring extreme volatility.

Capital Preservation and Flexibility continued


Aggregate managementCatlin underwrites classes of catastrophe-exposed business. The Group uses sophisticated modelling tools to manage its most signi!cant potential catastrophe threats from natural or man-made events.

Accumulation of risk is monitored and controlled against risk appetite limits in compliance with policy and procedures approved by the Group Board of Directors. A selection of modelled outcomes for the Group’s most signi!cant catastrophe threat scenarios is detailed below. The modelled outcomes represent the Group’s modelled net loss after allowing for all reinsurances.

Modelled gross and net lossesIn previous years the Group has provided two tables of modelled output. The Data Model output re"ected Catlin’s interpretation of how external models and methods should be applied and were used internally for market-consistent comparisons and for regulatory returns. However, due to uncertainties in the modelling, Catlin added further prudential margins to the modelled output to re"ect the degree of uncertainty in any peril or scenario. This output was the Adjusted Data Model, which was used to monitor the Group’s risk appetite, as guidelines in pricing inwards business, to in"uence outwards reinsurance purchasing strategy and as a key consideration in the assessment of required capital.

Signi!cant changes to some of the underlying third-party modelling software utilised by the Group has brought the Data Model Output more in line with the Adjusted Data Model Output. The changes in the underlying software did not materially change the Group’s view of the risk inherent in potential losses from these sources. Although Catlin continues to adjust for modelling de!ciency and set certain risk appetite limits lower for certain perils due to the increased uncertainty for losses from those sources, these adjustments are less signi!cant than in prior years. The Group now utilises only the Adjusted Data Model output, which is shown Table 5.

LimitationsThe modelled outcomes in Table 5 are mean losses from a range of potential outcomes. Signi!cant variance around the mean is possible. Catlin understands that modelling is an inexact science and undertakes mitigating actions against this model uncertainty. Modelling is used to inform and complement the views of both underwriting and actuarial teams.

Examples of catastrophe threat scenarios Table 5

US$m

Florida (Miami)

WindstormCalifornia

Earthquake

Gulf of Mexico

WindstormEuropean

WindstormJapanese

Earthquake

Estimated industry loss 125,000 78,000 112,000 31,000 51,000

Catlin Group

Gross loss 846 978 1,352 658 572

Reinsurance effect1 (490) (607) (995) (464) (432)

Modelled net loss 356 371 357 194 140

Modelled net loss as a percentage of capital available for underwriting2 14.2% 14.8% 14.3% 7.8% 5.6%

Outcomes derived as at 1 October 2011 on a single loss basis (i.e. net losses for individual threat scenarios are not additive)

1 Scenarios are shown after taking into account erosion of the underlying deductibles in the aggregate protections in place at 1 October 2011. If there were no erosion of the underlying deductibles in these programmes, the largest net threat scenario would be 23 per cent of capital available for underwriting.

2 Capital available for underwriting amounted to US$2.5 billion at 30 June 2011; de!ned as total stockholders’ equity (including preferred shares), less intangible assets net of associated deferred tax.

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Risk Management

Robust control framework supports underwriting, other activities

Catlin has a robust risk management and control framework which is designed to address all of the Group’s material risks. The Group framework is supported by risk and control frameworks developed for each of the underwriting hubs.

Catlin’s strategy for managing insurance- and investment-related risks includes:

analysing and assessing insurance risks with high-quality underwriting, actuarial and claims expertise;analysing and selecting high-quality investment options with experienced asset managers;diversifying insurance and investment risks through active portfolio management and risk modelling;allocating capital to business segments based on risk/return considerations;transferring risk through cost-effective risk transfer programmes;retaining risk within an approved risk appetite with appropriate levels of capital; andcontinuously monitoring for emerging changes affecting risk.

The Group’s strategy for managing other business and operational risks includes:

identifying and analysing risk through a disciplined risk assessment process;mitigating or avoiding risks that do not !t business objectives; andretaining risk within an agreed risk appetite with appropriate levels of capital.

Risk governance, roles and responsibilitiesAn illustration of Catlin’s risk governance framework, including high level roles and responsibilities, is shown in Chart 1.

SummaryA risk management culture is embedded throughout the Group and underwriting hubsResponsibility for risk management is spread throughout the organisationCatlin uses bespoke portfolio management tools, including sophisticated models

Risk governance, roles and responsibilities Chart 1

Business Strategy

Business Plan

Hub ExecutivesLocal Ownership

Group Function HeadsLocal Ownership

Chief Risk OfficerEnterprise Risk

Management Programme & Risk Modelling

Emerging RisksWorking Group

Assesses Emerging Risks

Risk & CapitalCommittee

Reviews All Risk Matters

Risk Appetite

Group Board

Inte

rnal

Aud

it -

Ass

uran

ce Group ExecutiveCommittee Risk Policies

The Board of Directors is responsible for the internal control of the Group, including approving business strategy and the Group’s annual business plan as well as determining risk appetite. The Group Executive Committee (‘GEC’) is charged by the Board of Directors with overseeing the risk management programme, including Enterprise Risk Management.

Responsibility for risk management is spread throughout the organisation. The chief executives of the Group’s underwriting hubs are responsible for developing and executing a strategy and business plan, subject to the approval of the GEC and the Board of Directors. The hub chief executives are responsible for identifying and managing the risks to the hub’s objectives.

From 1 January 2012 the traditional Risk function and the Enterprise Risk Management function were integrated and are headed by the Chief Risk Of!cer.

The objective of Catlin’s Enterprise Risk Management programme is to deliver an embedded Group-wide risk and capital management framework. It is based upon a transparent process to identify, assess and manage risks and to deploy risk appetite utilising an economic capital approach. This is intended to ensure Catlin retains focus on the risk/reward relationship and delivers a full range of bene!ts that include:

an improved understanding of all risks and related capital requirements enhancing capital ef!ciency;better decision making and enhanced pro!ts driven by the ability to assess and allocate the overall capital requirement using sophisticated capital modelling techniques;the selection of the most appropriate strategy from the range of available business decisions with direct reference to the Group’s risk appetite, optimal underwriting portfolio, capital requirements, investment strategy; and resultant expected pro!t and return on equity;stronger internal and external risk management communication;the maintenance of a consistent risk management approach throughout the Group as the business continues to grow and evolve; andcontinuing to meet existing and evolving regulatory risk and capital requirements, including Solvency II.


The aim is to ensure that a strong culture based on risk control and risk management continues to be embedded throughout the Group.

The Group’s Risk and Capital Committee meets regularly and has the following terms of reference:

propose risk governance policies and risk limits for GEC approval;review and monitor key risk indicators against risk appetite;oversee governance of internal risk and capital model;consider short- and longer-term capital requirements and assumptions for GEC consideration;monitor economic, regulatory and rating agency capital levels and changes in capital positions against targets; andmonitor the asset/liability positions and liquidity pro!le of the Group and legal entities.

The Emerging Risk Working Group is responsible for considering the potential impact of future issues that might emerge from changes to the external environment. The committee meets regularly and reports to the Group Risk and Capital Committee.

Portfolio managementCatlin uses bespoke portfolio management tools to enhance its understanding of the risk pro!le of its underwriting and investment portfolios.

To better evaluate its risk pro!le, Catlin has developed sophisticated models to construct portfolios of insurance and reinsurance business that explore the relationship between risk and return. In this work, extensive alternative scenarios are considered, each with a different mix of business classes.

This modelling enables the consideration of mixes of business that might produce higher levels of expected pro!tability with less volatility of return. This output is then analysed in the light of practical market and resource constraints to develop tactical shifts in the Group’s mix of business to utilise capital more ef!ciently.

Portfolio management is designed to help move Catlin towards an ef!cient frontier where expected return is maximised for a given level of volatility of return. The analysis considers a range of risk metrics over different return periods to ensure that the effects of individual strategies are taken into account.

Catlin’s portfolio management analysis is used to support tactical business planning decisions. This modelling considers dynamic near-term market conditions while maintaining awareness of longer-term strategic aims.

Catlin’s portfolio management builds on the existing framework of:

underwriting skill and judgment;other underwriting tools and management (e.g. pricing models and Catlin’s economic capital model);granular-level portfolio management and individual underwriting pricing for risk; andinsight into how markets evolve.

Key risksKey risks are considered both within the control framework and within the assessment of capital requirements. Catlin conducts in-depth stochastic modelling across all risk categories. This modelling aids in the development of capital requirements for strategic and annual business planning. The analysis is also shared with regulators for the development of risk-based statutory capital requirements.

Catlin analyses its key risks in the following categories:

Insurance risk – Underwriting risk for new business in a given planning period – Underwriting risk for business already written but not

yet earned – Reserving risk

Other risk categories – Financial markets risk – Liquidity risk – Currency risk – Credit risk – Operational risk

The approximate economic capital required by risk category is shown in Chart 2.

Economic capital required per risk category Chart 2

Reserving Unearned Underwriting – new business Other risk categories

31%

18%33%

18%

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Management of underwriting riskUnderwriting risk includes the risks of inappropriate underwriting, inadequate pricing and ineffective management of underwriting delegated to third parties. The competitive pressures on pricing and underwriting actions for some classes of business can be intense. To manage this risk, the Group pays particular attention to the underwriting control framework. The framework is developed at the Group level and adopted by each underwriting hub.

The Group Underwriting Board and the underwriting committee of each underwriting hub are responsible for overseeing the Group’s underwriting operations. The underwriting hubs and the GEC develop an annual underwriting plan for the consideration of and approval by the Group Board of Directors and the boards of the respective legal entities. The Group Underwriting Board and the GEC monitor and report on the performance against that plan and pricing adequacy on a quarterly basis by hub and by class of business.

Underwriting is conducted in accordance with a number of technical analytic protocols set by the Group Underwriting Board and is supported by pricing models. This includes de!ned underwriting authorities, guidelines by class of business, rate monitoring, underwriting peer reviews and protocols for delegation to third parties.

Catlin’s diversi!ed underwriting portfolio includes a material segment that is exposed to loss from catastrophic events that might impact numerous customers. The inherent risk of a large aggregation of such losses poses one of the most substantial exposures to the Group. Catlin management has put in place a robust control structure to mitigate the risk. The exposure is further protected by a risk transfer programme that responds to an array of possible catastrophic events.

The Group Head of Claims directs claims operations across the Group. Claims policies and procedures include de!ned authority levels, protocols for management oversight, an automated system to support and report on all major claims activity, and a formal review process for major claims. Internal and, if appropriate, third-party reviews of claims operations are conducted to ensure that the control framework is effective.

Management of reserving riskReserves for unpaid losses represent the largest single component of the Group’s liabilities. Loss reserve estimates are inherently uncertain. Actual losses that differ from the provisions, or revisions in the estimates, can have a material impact on future earnings and the Group’s balance sheet.

Catlin has a large, experienced team of actuaries and other actuarial staff. They work closely with the underwriting and claims staff within each of the underwriting hubs to ensure understanding of the Group’s exposures and loss experience. Analysis of the reserve requirements are initially developed by actuaries embedded within the underwriting hubs with close knowledge of local underwriting activities. Final reserves are developed by the Group actuarial team and reviewed with the Group Reserving Committee. Reserves are then presented to and approved by the Group Audit Committee.

The Group Chief Actuary oversees Catlin’s reserving processes. In addition, the Group receives independent external analysis of its reserve requirements annually.

Management of financial markets riskThe Group’s investment strategy aims to maximise economic value whilst minimising downside risk to capital and controlling earnings volatility. The investment strategy operates within a comprehensive Market Risk Framework that is based on capital, solvency, liquidity and earnings volatility.

The majority of Catlin’s investments are in a low-risk core portfolio of cash and high-quality !xed income investments which is aligned with the pro!le of the Group’s liabilities. This is complemented by a tactical portfolio invested in other instruments to extract premium from Catlin’s high levels of liquidity and to bene!t from market opportunities as they may arise.

All Group and subsidiary assets are managed by the Group Chief Investment Of!cer, under the direction of the GEC and the Investment Committee of the Group Board of Directors. The Board of Directors, through the Investment Committee, reviews and approves on a regular basis the investment strategy proposed by the Group Chief Investment Of!cer along with the limits contained in the Market Risk Framework. Subsidiary boards review and approve the strategy and the investment management framework as it applies to investment of each subsidiary’s assets.

Regular modelling is performed to test the structure, performance and liquidity of the investment portfolio in scenarios that include extreme insurance events coupled with investment losses. The economic market risk within the investment portfolio is monitored against set limits measured against a ‘Minimum Risk Benchmark’ based on the expected cash "ow pro!le of the liabilities of the Group. Limits are also in place to monitor the !nancial markets risk in the annual accounted earnings under US GAAP.

The Head of Financial Markets Risk within the Enterprise Risk Management function independently reports to the GEC and the Board Investment Committee on the position of Group assets relative to the Minimum Risk Benchmark and monitors the risk within a set of agreed limits. The report includes a qualitative assessment of the investment strategy to address any emerging issues that may not be re"ected in historical data. Assets by subsidiary entity are tested against a benchmark based on the legal entity liabilities with regular reporting to the subsidiary entity management.

Over the course of 2011, the Group has established in-house investment portfolio management capabilities. The investment team was strengthened across all functions, and new systems and processes were implemented as appropriate. The in-house portfolio management activities are fully embedded in the Financial Markets Risk framework, and risk control and oversight processes were adjusted as necessary.

Before a decision is made to contract with an external investment manager or invest in a fund, comprehensive due diligence and analysis is carried out by an in-house team, assisted by external professionals where appropriate. A new products approval process is followed for any investment instrument.

The Group continuously monitors the performance of each portfolio and manager. The Group performs on-site visits of all external fund managers on a regular basis. Each portfolio and manager is given written investment guidelines against which its activities are monitored. The guidelines are reviewed regularly to ensure their appropriateness, with revisions made as required.

The Group continually monitors its cash and investments to ensure that the Group meets its potential liquidity requirements. The Group sets minimum liquidity requirements; liquidity levels at 31 December 2011 were signi!cantly higher than the minimum required. The Group Treasurer, together with local !nancial of!cers,

Risk Management continued


is responsible for ensuring that suf!cient liquid investments are available as required by the Group and its subsidiaries. The Group Treasurer is also responsible for ensuring that cash is not overly concentrated with any one institution and operates within agreed limits.

The Group conducts business in a number of different currencies, primarily US dollars, sterling and euros. Trading risk arises from potential currency mismatch between cash "ows. There is also the risk of gains or losses arising from exposure in currencies other than the entity reporting currency and upon consolidation. The Group takes steps to manage, but not eliminate, those risks. To reduce foreign exchange risk, the Group Treasurer considers the Group’s currency requirements and the risks arising from foreign exchange "uctuations. Actual cash and invested assets are compared with the projected ultimate loss liabilities net of premiums due, reinsurance recoverables and near term operating expense by currency. Shortfalls by currency by subsidiary are addressed as required.

Key !nancial markets risks to the Group relate to inappropriate strategy, misalignment with Group risk appetite and achievement of appropriate diversi!cation. These risks might crystallise as !nancial loss or insuf!cient risk-adjusted returns.

Through its investment strategy the Group is exposed to interest rate risk, credit risk, foreign exchange risk, equity risk, commodity risk, illiquidity risk and in"ation risk. As part of the strategy, the Group may hedge its exposures with overlays and options to manage portfolio and macro risks.

Management of credit riskThe Group is exposed to credit risk primarily from unpaid reinsurance recoveries, banking counterparties and !xed income instruments in the investment portfolio.

The risk of recovering reinsurance is managed by the Group Chief Operating Of!cer, who along with the Chief Financial Of!cer is a member of the Group’s Reinsurance Security Committee. This committee establishes security standards applicable to all reinsurance purchases and monitors the !nancial status of all reinsurance debtors. This committee also reviews and approves all non-traditional risk transfers.

Credit risk arising from !xed income instruments is managed by the Group Chief Investment Of!cer. Credit risk arising from banking counterparties is managed by the Group Treasurer. The professional fund managers are given guidelines regarding minimum quality of investment instruments to be purchased.

Credit risk arising from underwriting risk-taking is managed through the underwriting control framework. There is a high level of communication between the underwriting and investment management staffs to ensure awareness and management of any overlapping credit exposure.

Reinsurers and !xed income instruments are monitored for the occurrence of a downgrade or other changes that might cause them to fall below Catlin’s security standards.

A comprehensive set of concentration limits designed to reduce the Group’s exposure to individual investment and banking counterparties is monitored by the Head of Financial Markets Risk within the Enterprise Risk Management function independently of the operating functions. Areas where signi!cant concentration of risk may exist within insurance and reinsurance recoverables follow a similar set of principles. The Group believes that there are no signi!cant concentrations of credit risk between its investments or its reinsurers.

Management of operational riskOperational risk within underwriting is the responsibility of the underwriting hub CEOs and the Group Underwriting Board. They are responsible for putting in place reliable controls to effect the underwriting risk management described above. The Group Head of Claims and the underwriting hub CEOs ensure reliable processes to deliver the claims risk management. Similarly, the Group Chief Investment Of!cer establishes processes and controls to reliably deliver the investment risk management.

IT system risk is another major element in Catlin’s operational risk. The IT function, incorporating the Group’s Change Management and Project Management teams, has de!ned roles and responsibilities and has put in place criteria for assessing change requirements and ensuring results-driven project management.

Quality management information and reliable data are key to an effective control framework. Data quality is regularly reviewed by a Data Quality team. A management information working group is in place to ensure continual improvements and enhance the Group’s current capabilities as well as maintain consistency across the Group as it evolves and grows.

The Group Chief Operating Of!cer is responsible for an Operations team that supports process improvement and controls throughout the Group. Responsibility for the Operations team as well as Data Quality, Management Information and IT will be transferred to a newly appointed Chief Administrative Of!cer during 2012.

The Group is exposed to operational risk through its relationships with key counterparties. The Group Treasurer is responsible for monitoring and managing banking relationships, including the potential for over-concentration. The Head of Investment Operations, reporting to the Chief Investment Of!cer, monitors the performance of all fund managers including compliance with investment guidelines. Risks arising from broker relationships and other local counterparties are managed at the underwriting hub level.

The Chief Executive Of!cer of each underwriting hub and Group heads of functions, in conjunction with the Group Executive Committee, are responsible for managing operational risk. Each underwriting hub CEO is required to establish and adhere to appropriate operational policies and procedures.

AssuranceThe GEC and the Board of Directors actively seek assurance of the effectiveness of the risk and control framework. The Group Head of Internal Audit directs an internal audit programme across all Group operations and subsidiaries. The programme is designed to provide reasonable assurance that the Group’s controls and procedures are able to contain risks within acceptable limits.

From time to time, the Group obtains assurance from independent third-party specialists on selected key operations. For example, an independent claims quality review is conducted at least annually. Actuarial reserving is reviewed by an independent actuarial !rm. In compliance with standards set by the Chartered Institute of Internal Auditors, the effectiveness of the internal audit function is periodically assessed by an independent reviewer.

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Investments

Good investment performance produced amid continued uncertainty

Total return on Catlin’s average cash and investments of US$8.4 billion during 2011 amounted to 3.1 per cent (2010: 2.7 per cent). Total investment return amounted to US$256 million, a 21 per cent increase (2010: US$212 million).

The good performance compared with 2010, despite continued global uncertainty during the year, resulted from the appreciation of the !xed income portfolio as interest rates declined, the active management of credit and sovereign risk within the !xed income portfolio and the increased allocation to !xed income which increased the duration of the portfolio and further allowed it to bene!t from the fall in interest rates.

At the beginning of 2011, the Group added to its corporate bond holdings and later in the year reduced those holdings in rallying markets. Exposure to commercial mortgage-backed securities was also reduced. Proceeds were reinvested into the core !xed income portfolio.

Risk arising from holdings in the banking sector bonds was reduced by selling down unsecured European bonds and increasing exposure to secured and covered bonds.

Investment performanceThe Group’s total investment return is analysed in Table 1.

Contribution to total investment return US$m Table 1

2011 2010

Interest income 156 147

Net gains on !xed maturities and short-term investments 102 46

Net (losses)/gains on other invested assets (2) 19

Total investment return 256 212

SummaryTotal investment return of 3.1 per centTotal cash and investments increased by 5 per cent to US$8.4 billionAllocation to !xed income investments increased to 72 per cent of total portfolio at 31 December 2011

Investment performance in 2011 is analysed by major asset category in Table 2.

Investment performance by major asset category US$m Table 2

31 Dec 2011

allocation

2011 average

allocation

2011 average

allocation % Return

Return %

Fixed income 6,019 5,393 65.0% 225 4.2%

Cash and short-term investments 2,178 2,737 33.0% 32 1.2%

Other invested assets 181 162 1.9% (2) (1.0%)

Overlays 10 11 0.1% 1 N/M

Total 8,388 8,303 100.0% 256 3.1%

The return on the !xed income portfolio re"ects unrealised gains from the decline in interest rates over the course of 2011 and as well as spread movements on corporate bonds and mortgage backed securities. The other invested assets comprise funds, equities, loans and private equity.

Investment portfolioCatlin’s total cash and investments increased by 5 per cent during 2011 to US$8.4 billion (2010: US$8.0 billion).

The Group’s investment portfolio remains liquid and conservatively positioned, in the light of continued global economic uncertainty. Cash, cash equivalents and short-term investments accounted for 26 per cent of the portfolio at 31 December 2011 (2010: 41 per cent). Forty-!ve per cent of these investments is held in money market funds and short-term bonds, 35 per cent is held in bank deposits, and the remainder is managed by Lloyd’s in respect of regulatory overseas deposits.

Liquid assets – which are de!ned as cash, government securities and !xed income securities with less than six months until maturity – accounted for 62 per cent of the portfolio (2010: 67 per cent).

The other invested assets comprise US$104 million relating to direct investments and co-investments with select investment partners, equities and loans and US$77 million of hedge funds for which redemption notices have been issued.

The Group’s asset allocation to !xed income investments increased to 72 per cent of total cash and investments (2010: 57 per cent). A breakdown by sector is shown in Table 3.

Exposure to bonds issued by banks, included within corporate bonds in the table, amounted to 4.3 per cent of our total cash and investments at 31 December 2011, of which one-third was secured or covered.

The Group did not have any direct sovereign exposure to the governments of Portugal, Italy, Ireland, Greece and Spain in its investment portfolio at 31 December 2011.


Detailed asset allocation at 31 December 2011 and 2010 % Table 3

2011 2010

Fixed income investments

US government and agency securities 20% 13%

Non-US government and agency securities 16% 13%

Agency mortgage-backed securities 9% 6%

FDIC-backed corporate bonds 1% 4%

Asset-backed securities 7% 4%

Corporate bonds 17% 15%

Commercial mortgage-backed securities 1% 2%

Non-agency mortgage-backed securities 1% 0%

72% 57%

Cash and short-term investments 26% 41%

Other invested assets 2% 2%

Total 100% 100%

Catlin’s !xed income portfolio at 31 December 2011 consisted of high-quality assets, with 98 per cent of the portfolio invested in government/agency securities or instruments rated ‘A’ or higher (2010: 97 per cent). The quality of the Group’s !xed income portfolio is analysed in Table 4.

Duration positioningThe duration of the Group’s insurance liabilities was 2.7 years at 31 December 2011, which resulted in a liability benchmark duration (including shareholders’ funds) of 2.4 years. The duration of the !xed income portfolio at 31 December 2011 was 2.5 years (2010: 2.5 years). The duration of total cash and investments was 1.8 years (2010: 1.5 years) and therefore was short of the liability benchmark. The duration of the portfolio was extended through the year as cash was allocated to the !xed income portfolio, but was kept short of the liability benchmark in the expectation that interest rates will rise. Overlays have been put in place to protect the portfolio against signi!cant movement in interest rates and to manage credit risks actively.

The yield to maturity on the !xed income portfolio was 1.4 per cent at 31 December 2011 (2010: 1.8 per cent).

Investment strategyThe Group’s investment portfolio at 31 December 2011 re"ects the revised investment strategy that was implemented during 2010. This strategy aims to maximise economic value whilst minimising

Fixed income investments by rating at 31 December 2011 US$m1 Table 4

Government/agency AAA AA A BBB Non Inv grade Assets

US government & agencies 28% – – – – – 1,702

Non-US government & agencies 22% – – – – – 1,326

Agency mortgage-backed securities 13% – – – – – 748

FDIC-backed corporate bonds 1% – – – – – 60

Asset-backed securities – 10% – – – – 602

Non-agency mortgage-backed securities – * * – – * 47

Commercial mortgage-backed securities – – – * * 1% 65

Corporate bonds – 4% 12% 8% 1% * 1,469

Total 64% 14% 12% 8% 1% 1% 6,019

1 Excludes US$8 million relating to interest rate derivative contracts and US$2 million relating to credit default options.* Less than 0.5 per cent

downside risk to capital and controlling earnings volatility. The investment strategy operates within a comprehensive market risk framework that is based on capital, liquidity and risk- adjusted returns and is independently overseen by Catlin’s Risk Management team.

Under this strategy, a signi!cant majority of Catlin’s investments comprise a core portfolio of highly rated sovereign, agency and corporate bonds and AAA-rated short-duration asset-backed securities. The core portfolio is aligned with the pro!le of the Group’s liabilities and managed by a select group of external managers and a newly established in-house team. Ninety-eight per cent of !xed income investments were managed under the Group’s core investment guidelines at 31 December 2011.

Tactical investments are implemented through a select group of specialist managers and an in-house special situations team established to pursue a concentrated portfolio of primarily corporate investments across the capital structure on a partially hedged basis.

Catlin will pursue opportunities, as they arise, that exploit the Group’s high levels of liquidity and its balance sheet capacity to invest with a longer-term horizon, capture liquidity premium and bene!t from dislocations.

As part of the investment strategy, the Group uses overlays to manage portfolio and macro-economic risks ef!ciently. As at 31 December 2011, the Group has in place options which provide protection in the event of a signi!cant movement in interest rates during 2012 and to provide protection against signi!cant levels of credit spread widening.

The Group’s investment team has been strengthened during the year and comprises 16 professionals who, together with ongoing investment in systems and processes, enable the Group to manage a proportion of the investments in-house. At 31 December 2011 US$2.6 billion was managed by the in-house team.

OutlookCatlin will continue to focus on capital preservation and will seek opportunities that offer attractive risk-adjusted returns whilst maintaining the "exibility to capitalise on dislocations that may occur amid the on-going uncertainty in !nancial markets. Whilst interest rates are expected to remain at historic low levels for an extended period, the Group’s portfolio is well-positioned to perform under a variety of economic scenarios. The in-house capabilities established during the past year provide a strong platform to actively manage portfolio risks, capture risk and liquidity premiums on a systematic basis, and provide the Group with better real time insights into market developments.

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“Treating people with dignity is important in any relationship, but particularly one built on trust and commitment. Catlin offers clients a promise to provide financial protection when they suffer losses. Maintaining a relationship based on a future promise requires trustworthiness based on professionalism and respect.”Dave PorteusHead of Group Information Management Programme/Director of US Planning & MarketingHartford

Dave PorteusHead of Group

Information Management Programme/Director of

US Planning & Marketing

FunctionOperations

HubUS

OfficeHartford

BirthplaceHartford

Joined Catlin2009

What I DoDave Porteus

I have already worn several hats at Catlin. I helped plan the expansion of our US operations, a growing and pro!table part of the Group. My US marketing role supports that growth. My most recent assignment, as head of the Group’s information management programme, increases value by ensuring the accuracy and consistency of the information we use to run our business.


The Value of the Catlin CultureCreating a Responsible and Sustainable Business

Catlin’s distinctive corporate culture has been an integral part of the Group ever since Catlin was established in 1984. The Group has evolved over the years, as Catlin has grown to become a publicly listed company with nearly 2,000 employees and US$4.5 billion in gross premiums written. However, the basis for the Catlin culture has remained constant over time.

The foundation of the culture is based on !ve core values that are shared by Catlin employees globally:

Transparency. The Group promotes open communication, both internally and when dealing with clients and brokers. The free and open exchange of information and ideas is encouraged. Wherever possible, of!ces are designed with open layouts to promote communication, support teamwork and discourage hierarchies. Management encourages feedback and suggestions from employees and fully considers employee input when making decisions.Accountability. Catlin requires employees to take responsibility for their actions and decisions. Emphasising accountability encourages employees to think and act as owners.Teamwork. Catlin employees are expected to act in the best interests of the Group as a whole, not their own of!ce or department. Parochial concerns take second place to the needs

Our culture, based on five core values, produces a worldwide commitment to corporate responsibility

SummaryThe Catlin Culture serves as a foundation for all of the Group’s activitiesCatlin is recognised by brokers for delivering high-quality underwriting and claims serviceCatlin’s workplace policies encourage a positive, high-performance environment for nearly 2,000 employees worldwideCatlin makes a substantial investment in the communities in which it operates, focusing on youth and educational programmesCatlin recognises its duty to protect the environment, both through sustainable operations and by sponsoring scienti!c research

of the client and the Group. This mentality reinforces the employee co-operation that is essential to Catlin’s success.Integrity. Catlin employees are expected to conduct themselves in a manner re"ecting the highest ethical standards. Employees are judged not only on the results achieved, but by the manner in which they are achieved. Underlying this value is the Catlin Code of Ethical Conduct, by which all employees must abide.Dignity. Catlin is committed to treating all employees fairly and with respect, and ensuring that its employees treat clients, brokers and other employees in the same manner.

Corporate responsibilityAt Catlin corporate responsibility encompasses business-related social, ethical and environmental impacts. We believe that our corporate responsibility initiatives address Catlin’s own competitive interests and the interests of wider communities.

Catlin’s corporate responsibility programme covers four principal areas:

Marketplace. The Group is !rmly committed to providing excellent and ethical service to clients and their brokers.Workplace. Catlin strives to adopt and implement responsible employment practices and policies to support the Group’s goal of being the employer of choice in our business sector.Community. The Group sponsors and encourages employees to participate in activities that have a positive impact on the communities in which our of!ces are located.Environmental. Catlin not only is committed to sustainable operations, but seeks to make valuable contributions towards a better understanding of our planet’s future.

Further information about Catlin’s corporate responsibility activities are contained in the 2011 Corporate Responsibility Report. This report is available on the Catlin Group website at: www.catlin.com/Responsibility/Reports

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FTSE4GoodIn recognition of its overall efforts toward corporate responsibility, Catlin since 2007 has been a member of the FTSE4Good index.

Created by the global index company FTSE Group, FTSE4Good is an equity index series that is designed to facilitate investment in companies that meet globally recognised corporate responsibility standards. Membership in the FTSE4Good indicates that companies have met stringent social and environmental criteria, and are positioned to capitalise on the bene!ts of responsible business practice.

MarketplaceCatlin strives to ensure that clients are treated fairly and honestly. The fair treatment of clients is a central consideration of any decision or process that could have a bearing on the client relationship.

Catlin’s commitment to the fair treatment of clients and brokers includes:

making every attempt to meet clients’ and brokers’ expectations;ensuring that policy wordings and other documentation are clear, fair and not misleading;responding promptly to queries; andensuring the highest levels of claims service, including the prompt payment of valid claims.

Service to brokersCatlin is committed to providing high standards of service to brokers, who produce the vast majority of the Group’s business. The maintenance of stable, long-term relationships with brokers is a necessity for the Group, not only to maintain the "ow of business but as part of providing the best possible service to the end client.

Catlin of!ces around the world strive to provide the highest quality service to brokers. The service provided by the Group differs from region to region, recognising local customs and practices.

During 2011 Catlin established a Broker Partnership function, the aim of which is to strengthen the Group’s relationships with brokers by providing service that responds to broker needs. In the London market, where broker-insurer transactions are largely conducted on a face-to-face basis, Catlin during 2011 implemented a comprehensive broker service programme. To facilitate brokers’ access to Catlin underwriters, selected underwriters in each of Catlin’s business groups are available from 8am to 6pm each business day, allowing brokers to discuss and place business outside of the traditional ‘underwriting hours’ observed in the

The Value of the Catlin Culturecontinued

market. Each business group also issued a service charter to brokers, whose main components included:

the advance publication of underwriters’ weekly schedules;the timeframe during which brokers’ queries will be answered; anda pledge to give brokers full information about how underwriting decisions are made.

The London service initiative has been well-received by brokers. According to a November 2011 survey of London market placing brokers conducted by Gracechurch Consulting (see Chart 1a and 1b), Catlin ranked !rst among London underwriters on the basis of:

availability and accessibility;position as recognised market leader;commitment to outstanding customer service;outstanding technical capabilities;committed to working in partnership with brokers; andoutstanding underwriting talent.

0 5 10 15 20 25 30

0 5 10 15 20 25 30

0 5 10 15 20 25 30

Catlin 25%

Underwriter availability and accessibility

Recognised market leader

Commitment to outstanding customer service

14%

12%

Insurer A

Insurer B

Catlin 26%

22%

18%

Insurer A

Insurer B

Catlin 18%

12%

9%

Insurer A

Insurer B

0 5 10 15 20 25 30

Outstanding technical capability

Catlin 19%

11%

11%

Insurer A

Insurer B

Catlin’s overall performance as rated by London brokers % Chart 1a


Catlin’s overall performance as rated by London brokers % Chart 1b

0 5 10 15 20 25 30

0 5 10 15 20 25 30

Outstanding underwriting talent

Catlin 22%

16%

14%

Insurer A

Insurer B

Catlin 16%

15%

11%

Insurer A

Insurer B

Committed to partnerships with brokers

Source: Gracechurch Consulting

Claims serviceCatlin understands that the true value provided by an insurer or reinsurer is demonstrated following a claim, and the Group has placed an emphasis on providing superior claims service for many years. As a result of these efforts, Catlin continues to be an acknowledged leader in claims management worldwide.

The Group has established claims teams in each of the six underwriting hubs. This allows Catlin to provide local, responsive service to clients and brokers following a claim, whilst following an agreed set of core claims practices and philosophies.

Claims service is one of the Group’s key performance indicators (see page 10). Thirty-three per cent of the claims brokers surveyed by Gracechurch Consulting during 2011 said they would highly recommend Catlin with regards to claims service (2010: 30 per cent). It was the third consecutive year that Catlin has been the most highly recommended insurer with regards to claims service (see Chart 2).

London insurers recommended for claims service in 2011 % Chart 2

35

30

25

20

10

5

0

15

33%

18%16%

14%

9%

6% 6%5% 5%

4%

InsurerI

InsurerH

InsurerG

InsurerF

InsurerE

InsurerD

InsurerC

InsurerB

InsurerA

Catlin

Question: which two insurers would you currently highly recommend to clients based on the quality of claims services to brokers?

Source: Gracechurch Consulting

In many cases the Group uses outside experts – including lawyers and claims adjusters – during the claims handling process. Catlin strives to choose outside claims specialists with excellent reputations who share the Group’s claims philosophy. In all cases the Group retains !nal responsibility for the outcome of a claim.

Code of Ethical Conduct and other policiesIntegrity is one of Catlin’s !ve core values, and all Catlin employees are expected to conduct themselves in a manner that re"ects the highest ethical standards.

In 2004 the Group adopted a Code of Ethical Conduct, which describes the commitment by Catlin and its employees to conduct business in a fair, proper and ethical manner in compliance with applicable laws, regulations and professional standards. All new employees are obliged to agree that they will abide by the Code, and existing employees reaf!rm their concurrence with the Code on an annual basis. The Code of Ethical Conduct is available on the Group’s website at http://www.catlin.com/en/About/Howweoperate/Ethics.

The Group has adopted and put in place other ethical policies regarding such subjects as document retention, broker remuneration, inside information, share dealing, whistle-blowing, data security, fraud prevention and money laundering. All of these policies can be readily accessed by all Catlin employees via ‘The Catwalk’, the Group’s intranet. Along with the Code of Ethical Conduct, these policies form the standards by which all Catlin employees are expected to act.

WorkplaceThe goal of Catlin’s workplace and employment policies is to encourage a positive, high-performance culture where employees can ful!l their career ambitions whilst helping both Catlin and its clients to achieve their corporate ambitions and producing value for Catlin’s shareholders.

The Catlin culture encourages employees to act to the best of their abilities and emphasises the partnerships that exist among Catlin, its employees, clients and brokers.

Catlin seeks to recruit and employ the best people regardless of age, gender, disability or ethnicity. In particular, we aim to attract employees who will be committed to a long-term career with the Group. In return, Catlin offers competitive reward packages and career development opportunities within a strong organisation with sound values.

Our employeesCatlin employs a truly diverse workforce, enabling the Group to deliver high-standard products and services to a wide variety of clients around the world. At 31 December 2011 the Group employed 1,827 people, an increase of 14 per cent during the year (2010: 1,602).

Catlin’s workforce has grown steadily in recent years, largely in line with the increase in the Group’s premium volume and the development of the Group’s non-London/UK underwriting hubs (see Chart 3 on page 50). The largest percentage growth in employees during 2011 occurred in the Asia-Paci!c, Europe and US underwriting hubs; gross premiums written in each of these hubs increased by more than 20 per cent during the year.

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Employee growth per year (at 31 December) Chart 3

20112010200920082007

2,000

1,500

500

0

1,000

$4,500

$4,000

$3,500

$2,000

$1,500

$3,000

$2,500

1,051

1,180

1,380

1,602

1,827 Gross premiums written – US$m Employees

At 31 December 2011 Catlin operated 55 of!ces in 21 countries. Forty-seven per cent of employees worked in the United Kingdom during 2011 (see Chart 4). Fifty-three per cent of the Group’s workforce hold Underwriting, Actuarial or Claims positions (see Chart 5).

Employees by location at 31 December 2011 Chart 4

United Kingdom Bermuda United States* Asia-Paci!c Europe Canada

22%

12% 47%

4%

11%

4%

* Employees in Brazil and Colombia are included in the US underwriting hub

Employees by function at 31 December 2011 Chart 5

Underwriting Claims Operations IT Finance Actuarial Administration/Other

40%

8%14%

13%

5%10%

10%

One of the Group’s key performance indicators chosen is the annual employee turnover rate. During 2011 the Group’s employee turnover amounted to 12.7 per cent (2010: 9.8 per cent). However, turnover among underwriting employees decreased during 2011 slightly to 8.8 per cent (2010: 9.1 per cent). Employee turnover during the past !ve years is shown in Chart 6. Turnover increased signi!cantly during 2007 following the acquisition of Wellington Underwriting plc, but returned to normalised levels in succeeding years.

Employee turnover rate* % Chart 6

20112010200920082007

30

25

20

5

0

10

15

25.4%

14.0%

10.4% 9.8%

12.7%

* Including agreed departures

Learning and development The Group is committed to enhancing the careers of its employees by offering a variety of management, technical and professional development programmes as well as mentoring and coaching, to help employees achieve their career ambitions.

Catlin Development ProgrammeThe Catlin Development Programme (‘CDP’) was established in 2009 to broaden the pool of talent within the Group by combining the recruitment of recent university graduates along with the identi!cation of talented employees currently in the early stages of their careers at Catlin. The CDP is one of the ways in which Catlin continues to build a business for the future.

The CDP is an intensive mix of personal development, professional quali!cations and cross-departmental business rotations. These rotations allow participants to develop specialist knowledge within their own functional areas, whilst building relationships with other teams and gaining a wider, commercial understanding of the business. The participants also begin their studies towards appropriate industry-related quali!cations to develop technical knowledge, and they also attend courses focusing on personal development and business awareness.

During 2011 graduates in the United Kingdom and United States joined the programme. Over the course of 2012 the CDP will be extended to all hubs.



Performance management, talent management and leadership developmentCatlin adjusted its appraisal framework during 2011 to support greater differentiation in the management of employee performance. Speci!cally, greater accountability was placed on managers when conducting appraisal and a more comprehensive review process was introduced.

Providing mangers with the skills to manage others is fundamental to the Group’s success. Catlin has developed a global Aspiring Leaders’ programme in conjunction with Ashridge Business School in the United Kingdom. Approximately 100 middle managers across all functions and underwriting hubs have now attended the programme, which focuses on the development of fundamental leadership and management skills aligned to Catlin’s core values and competencies. A revised programme is being designed for 2012.

In the UK, the Group introduced a new ‘Results through People’ programme, which is designed to develop managerial skills among junior managers. This programme will be extended to include the Bermuda, US, and Canada hubs in 2012 and globally in future years.

One Catlin underwriter was a successful applicant for the prestigious Munich Re Alois Alzheimer Scholarship Programme, a 12-week course that broadens insurance knowledge and offers an extensive global network with other insurance professionals. Catlin also supported leadership programmes at Oxford Saïd Business School and Henley Business School in the United Kingdom during 2011.

The number of days devoted to Catlin-supported learning and development activities increased by 11 per cent during 2011 (see Chart 7).

Learning and development days Chart 7

2011201020092008

4,000

3,000

1,000

0

2,000

1,749

2,379

3,555

3,954

RemunerationCatlin offers competitive remuneration packages designed to attract, retain and motivate staff.

Remuneration, particularly with respect to the Executive Directors and other senior executives, is designed to create incentives to meet !nancial and strategic objectives set by the Board of Directors, primarily through variable bonus and share plan components. The Group’s policy is to align executive rewards with the creation of shareholder value.

The Group’s bonus plan includes all employees. The plan is based on the Group’s pro!tability and related measures of !nancial performance, with individual awards being based on the

performance of the Group and the individual’s own performance. The plan creates alignment between shareholders and employees by rewarding achievement of business plan objectives and superior individual performance, without encouraging excessive risk-taking.

In 2004 Catlin adopted the Performance Share Plan (‘PSP’), which is designed to reward participants for delivering growth in shareholder value. Forty-two per cent of the Group’s employees participated in PSP during 2011. Under the plan participating employees receive conditional awards of shares (or nil-cost share options); the vesting of these awards depends on the achievement by the Group of performance conditions based on the increase in net asset value per share.

Further details regarding the bonus plan and the PSP are contained in the Directors’ Remuneration Report on page 105.

The Company also offers share purchase plans to most employees, and eligibility was further expanded during 2011. These plans offer employees the opportunity to purchase Catlin shares at a discount to market value through monthly salary contributions. The ‘International Sharesave Plan’, !rst offered in 2008, was extended to Switzerland for the !rst time in 2011, attracting an employee participation rate of 75 per cent. This plan is also offered to employees in the United Kingdom, Bermuda, Canada, Germany Singapore and Malaysia. A similar plan, the ‘Employee Stock Purchase Plan’, is offered to US employees.

Catlin provides employees with a range of non-monetary employee bene!ts, including pension, life insurance and medical plans. As an international employer, the bene!ts offered to employees vary from country to country, taking into account local laws and practices. The Group is currently conducting comprehensive reviews of its employee bene!t programmes in key markets to ensure that these remain competitive and appropriate. These reviews have already been completed for employees in the UK and Switzerland, and changes have been implemented as a result.

To provide employees with a better understanding of their total rewards, Catlin has continued to implement individual online Total Compensation Statements.

Catlin is also implementing a revised global mobility policy. This will facilitate an increasing number of international moves and secondments.

Employee communicationsCommunication is key to the Catlin culture, and the Group makes concerted efforts to ensure good communication among employees in each underwriting hub, both to reinforce the Group’s core values and to provide employees with information to help them improve their performance.

The Group uses a variety of methods to provide information to employees, ranging from daily meetings within departments to regular ‘Town Hall’ meetings conducted by the Chief Executive in various Catlin of!ces. The Town Hall meetings that are held in London are webcast to all employees worldwide via ‘The Catwalk’, the Group’s intranet.

The Catwalk – which contains comprehensive information about the Group, its departments, policies and procedures – will be redesigned during 2012 to take advantage of emerging technology to improve the "ow of information to employees and to facilitate collaboration and information sharing among Catlin employees worldwide.

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Disabled employees and candidatesCatlin gives full and fair consideration to applications for employment made by disabled persons, making any necessary workplace adjustments for employees with disabilities and providing specialised training and career development where appropriate. If an employee were to become disabled, the Group would make arrangements insofar as possible to continue that person’s employment and/or to provide training for another suitable position.

Equal opportunitiesThe Group is committed to fair and equal employment opportunities for all persons and extends fair and equal employment opportunities without regard to race, colour, religious belief, gender, sexual orientation, national or ethnic origin, age or disability.

Catlin seeks at all times to comply with legislation governing non-discrimination in employment. The Group employs individuals for available positions who are quali!ed on the basis of merit and ability alone. This policy applies to all terms and conditions of employment, including, but not limited to, recruitment, hiring, placement, promotion, demotion, transfer, rates of pay or other forms of compensation, termination, redundancy, training, use of all facilities and participation in all Catlin-sponsored employee activities.

Health and safetyThe Group takes all appropriate efforts to ensure the health, safety and welfare of its employees whilst at work as well as those who may be affected by Catlin’s operations. Employees are expected to take reasonable care for their own health and safety at work as well as those of others and to co-operate with management to create a safe and healthy working environment.

The discharge of health and safety responsibilities is accorded equal priority with that of other statutory duties and objectives.

CommunityCatlin believes that a responsible company must not only offer value to clients, employees and shareholders, but also provide value to the communities in which it operates. The Group support numerous charities and community projects around the world, focusing on initiatives that relate to youth and education and the environment.

Catlin’s community strategy consists of two primary strands:

Charitable donations – Catlin makes monetary contributions to a variety of charities and good causes in each of the underwriting hubs. Employee/company involvement – Catlin encourages employees to become involved in activities whose goal is to improve the communities in which they live and work. For its own part, Catlin as a company also participates in community-oriented initiatives.

These efforts are co-ordinated by a Community Committee, which includes employees from across the Group worldwide. The committee meets frequently to manage charitable contributions centrally and to discuss programmes to encourage employee charitable giving and involvement in community schemes. Each underwriting hub also has its own community committee.

Full details of Catlin’s community involvement activities are available in the Group’s 2011 Corporate Responsibility Report, which is available at www.catlin.com/en/Responsibility/Reports.

Charitable donationsDuring 2011 Catlin’s charitable donations increased by 37 per cent to US$1,108,224. (2010: US$810,857), which re"ects Catlin’s growing commitment to the communities in which its employees live and work. Since 2007 Catlin has increased its annual charitable donations by more than 500 per cent (see Chart 8).

Charitable donations US$ Chart 8

20112010200920082007

1.2m

1.0m

0.8m

0.2m

0

0.4m

0.6m

$233,133

$672,130 $674,180

$810,850

$1,108,224

The majority of Catlin’s charitable donations are made in the United Kingdom, where the largest number of employees work, and in Bermuda, which is the Group’s headquarters.

Employees working for the London/UK underwriting hub select partner charities. These charities receive monetary donations from Catlin and its employees and are also a focus for employee involvement. During 2011, the Group supported two UK partner charities:

The Alzheimer’s Society, which works to improve the quality of life of people in the UK affected by dementia; and The Dame Vera Lynn Trust, which provides support to children with cerebral palsy and their parents and carers.

During 2012, Catlin’s UK employees have chosen to support The Children’s Trust Tadworth, a national charity which works with children who have multiple disabilities and/or complex health needs.

Catlin also maintains a longstanding sponsorship of the Sick Children’s Trust, a UK-based charity which provides support and accommodation to the families of children undergoing hospital treatment. Catlin Group Chief Executive Stephen Catlin is Chairman of the Sick Children’s Trust, and other Catlin executives contribute time to the charity.

Catlin sponsors or makes donations to a variety of Bermuda charities and community activities, including:

The Centre on Philanthropy, which encourages an attitude of giving, promotes volunteerism, and documents charitable behaviours and issues in Bermuda.



Cedarbridge Academy. Catlin is a longstanding sponsor of a programme to encourage students at one of Bermuda’s two public secondary schools to achieve the academic standards required to enter the island’s international insurance industry. Catlin provides contributions towards tuition and fees for selected students in connection with their post-secondary education, as long as they meet academic performance, attendance and conduct standards. Each participating student is also mentored by a Catlin Bermuda employee.The Bermuda Football Association’s National Academy programme, which provides football (soccer) training to Bermudian youths. A portion of Catlin Bermuda’s donation will be used to provide training out!ts and other equipment for boys and girls aged 11-17.Catlin End to End. Catlin Bermuda is the title sponsor of Bermuda’s largest charitable fund-raising event. Held annually in the spring, the event encourages thousands of people to travel the length of Bermuda by various means – running, walking, cycling, swimming, rowing and paddling – to raise funds for charity. The more than 2,000 participants in the 2011 End to End raised more than US$250,000 on behalf of 11 Bermuda charities. Since it was !rst held in 1988, the End to End has raised nearly US$4 million for good causes.

Catlin has sponsored the End to End since 2008 and has committed to be the title sponsor through 2013.

Give As You EarnIn the United Kingdom Catlin offers employees a ‘Give As You Earn’ scheme, under which employees authorise the Group to deduct from their monthly salaries contributions to their chosen charity, which are matched by the Group up to a maximum of £120 per employee per annum.

Employee/company involvementCatlin and its employees worldwide participate in a variety of community involvement programmes, ranging from large-scale corporate sponsorships to ‘Volunteering Days’ organised by individual departments or teams.

The focus of Catlin’s community involvement initiatives are based in London, where approximately 40 per cent of the Group’s employees are based. The main programmes include:

St Paul’s Way Trust School. Catlin since 2009 has been a trustee and partner of St. Paul’s Way, a secondary school in the London borough of Tower Hamlets located near the Group’s London of!ce. Catlin has established a multi-faceted relationship with St Paul’s Way, the goal of which is to improve the education provided to students by the school, which serves an ethnically diverse community London’s East End. A senior Catlin executive is both a school trustee and a member of its governing body. St Paul’s Way has been transformed in recent years from a critically undersubscribed school to a vibrant and successful place of learning. Applications have increased substantially, and the percentage of students receiving !ve A*-C grades on GCSE examination has increased to 60 per cent from 36 per cent in three years.

Besides making !nancial contributions in support of the school’s marketing activities, Catlin encourages employees to donate their time to St Paul’s Way. Catlin employees serve as

reading partners for students, mentors who teach business skills and advise students on career opportunities, and mentors to faculty members. Catlin’s Marketing/Communications team provides guidance to the school, particularly relating to the recruitment of students.

Catlin received the 2011 ‘Heart of the City Award’, part of the Dragon Awards bestowed annually by the Lord Mayor of London on socially responsible companies in the City of London, in recognition of its efforts to help revitalise St Paul’s Way. The Heart of the City Award is given to companies with outstanding community involvement programmes established within the past three years.Lloyd’s Community Programme (‘LCP’). The LCP’s mission is to improve the opportunities for and environment of the people of Tower Hamlets and neighbouring East London boroughs by mobilising the support and involvement of individuals and companies in the Lloyd’s market. Catlin has worked with the LCP for many years and is actively involved in a number of projects.

Catlin is a member of the East London Business Alliance, which co-ordinates employee volunteering and large and small scale community projects, and Business in the Community, an organisation supported by more than 850 companies in the UK which advises businesses on social responsibility, community and environmental issues.

Catlin encourages employees to become involved in local community and social projects. Catlin strongly believes that employee volunteering has tremendous value for the community, the employee and for the Group.

Catlin provides every employee worldwide with a minimum entitlement of one day annually to participate in an approved community service project. The Group encourages employees to organise team volunteering days, whereby groups of employees undertake a day of work in the community under the auspices of a local charity. Catlin in London partners with the LCP and the East London Business Alliance to assist team in organising volunteer projects.

Examples of some of the many volunteer projects organised by Catlin employees in 2011 include:

working with the Alameda County Community Food Bank to package vegetables for distribution to the local

community.

to help the St Mary’s Food Bank distribute food to neighbours in need. This was the third year that Scottsdale employees had worked with the food bank.

a local city farm that offers city children the opportunity to learn about farm animals. The employees painted signs,

mucked out the animals’ pens and assisted refurbishing an outdoor classroom.

Fund Matching SchemeThe Group operates a Fund Matching Scheme which acknowledges the voluntary work and fund-raising efforts of its employees. The scheme is designed to recognise money raised through employees’ personal endeavours such as running in marathons or organising special events.

Under the scheme Catlin will donate, usually up to a maximum of £500 or $1,000 per employee per annum, in support of any fund-raising activities and in recognition of volunteering commitments. In each case the award will be made payable to the charity chosen by the employee.

Catlin received a Dragon Award

from the Lord Mayor of London for its work with a local

school.

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EnvironmentalCatlin takes seriously its duty to protect the environment in which we live. The Group’s environmental responsibility programme consists of the Group’s own sustainability activities as well as sponsorship of activities to provide and circulate scienti!c facts regarding the environment, including climate change.

Sustainability activitiesPotential changes in the environment – especially long-term weather patterns – could signi!cantly increase the frequency and severity of certain perils, including hurricanes and "ooding. These changes could have an extreme impact on Catlin, which is a major insurer and reinsurer of property risks. Climate change may also increase the potential for third-party liability claims, including negligence complaints against organisations whose operations causes changes to the environment and their executives.

Catlin during the past year has taken part in several business activities relating to potential environmental changes:

Emerging risks. Catlin in 2010 established an Emerging Risks Working Group to examine new and developing risks, both globally and at a local level. The working group is chaired by the Group’s Deputy Chief Underwriting Of!cer. The analysis carried out by the working group will not only seek to identify potential threats to the Group’s business and the strategies to be employed to manage those threats, but also to identify potential business opportunities, such as new products that the Group may offer to clients.Climate modelling. Catlin uses climate model projections to perform sensitivity studies and enable the assessment of potential future losses in key regions in which Catlin currently operates. The Group conducts research to identify whether there are climate change models or tools that Catlin can adopt to provide an improved understanding of local climate change at shorter timeframes and support improved future strategic decision-making relating to risk pricing and allocation.‘Fleet Directions’. Catlin UK Motor Fleet underwriting team actively encourages clients to adapt their behaviour with regard to climate change. Through ‘FleetDirections’ (www."eetdirections.com), Catlin provides Motor Fleet clients with online tools that provide environmental analyses of single vehicles and entire "eets, including the calculation of CO2 emissions. Catlin believes it is the !rst insurer in the UK to recognise a client’s ‘green’ credentials when pricing Motor Fleet insurance.

Carbon footprintCatlin annually commissions a recognised third-party carbon auditing !rm to help calculate and verify its carbon footprint. The measurement, based upon the Greenhouse Gas Protocol and Carbon Trust guidance, includes ‘Scope 1’ (fossil fuel and

refrigerant usage) and ‘Scope 2’ (electricity) emissions associated with the of!ces in which Catlin is based. Catlin voluntarily discloses ‘Scope 3’ emissions sources, including business travel by air and rail, paper, water and waste.

The studies concluded that the total carbon footprint of Catlin’s global operations during 2010, the most recent data available, increased by 38 per cent to approximately 12,086 tonnes CO2e (2009: 8,741 tonnes). Total emissions per employee increased by 39 per cent to 7,539 kilos (2009: 5,443 kilos).

The increase is attributable to several factors:

An improvement in the carbon-related data collected by the Group as it devotes more resources to carbon monitoring. Eighty-two per cent of the emissions reported in 2010 were based on ‘good’ quality data, compared with only 54 per cent in 2009.A substantial increase in air travel by Catlin employees from London to Zurich. Catlin in 2010 established Catlin Re Switzerland, which necessitated increased air travel between the UK and Zurich. In addition, certain !nancial functions were transferred from London to Zurich during 2010, which also increased the necessity of air travel between the two cities.An increase in air travel between London and Catlin’s Asian of!ces, particularly Singapore and Kuala Lumpur. The increased air travel arose from two sources: an ongoing project in 2010 and early 2011 to standardise operations across all Catlin of!ces, particularly those in Asia, and the increasing importance of the Kuala Lumpur of!ce, which provides shared services – including data input and cleansing – to other Catlin of!ces.

Catlin recognises the increase in air travel and is actively promoting the use of video conferences instead of air travel wherever practicable.

Carbon Disclosure ProjectCatlin is a member of Carbon Disclosure Project (‘CDP’), an initiative established in 2000 to collect and distribute high-quality information about businesses’ carbon emissions. More than 2,500 organisations in some 60 countries now participate in the CDP.

Based on 2010 data, Catlin achieved a carbon disclosure score of 72, a signi!cant improvement over the score of 57 the previous year, and the highest score amongst FTSE 250 insurance organisations. According to the CDP, a score higher than 70 typically indicates that a company has a strong understanding and management of its exposure to climate-related risks and opportunities, a strategic focus and commitment to understanding the business issues related to climate change, an ability to measure and manage the company’s carbon footprint, and makes regular and relevant disclosure to key corporate stakeholders regarding environmental impacts.

Carbon offsettingCatlin makes contributions to projects that result in reduced emissions of carbon dioxide or greenhouse gasses in order to offset emissions from "ights taken by Group employees. Carbon offsetting takes place as a last resort after reduction programmes have been implemented. Catlin has offset carbon emissions from the air travel of UK-based employees since 2007 and employees worldwide since 2010. In total, Catlin has offset 13,996 tonnes of CO2e at a cost of £121,143, bene!ting various projects.

The ‘offset credits’ purchased by Catlin during 2011 were used to !nance a project in Cholburi, Thailand, which uses biogas from wastewater, rather than fossil fuels, to generate heat and power



at a tapioca starch drying factory. During 2012, Catlin’s carbon offsets will be used to help !nance the Kasigau Corridor REDD+ (Reduced Emissions from Deforestation and Degradation) project in Kenya. More information about this innovative project is available at www.forestcarbonportal.com/project/kasigau-corridor-redd-project.

Office design/‘built environment’Catlin leases all of its of!ce space and does not have total control over the environmental ef!ciency of the of!ces it occupies. Wherever possible, Catlin works with landlords to promote environmentally friendly of!ce design and best practice. Catlin has developed standards in the selection, design, !tting out and occupation of all new of!ces. These standards identify issues such as building energy ef!ciency, daylight provision, public transportation, water usage, materials used, energy monitoring and targeting, and waste management/recycling.

With the so-called ‘built environment’ accountable for approximately 50 per cent of Catlin’s global carbon footprint, all new of!ces are designed with ef!ciency in mind. This process originated with Catlin’s London of!ce, which was occupied in March 2011. The ef!ciency achieved in the design and !t-out of the London of!ce exceeded Catlin’s expectations (see Table 9).

Environmental efficiency in Catlin’s London office Table 9

Key performance indicator Target Result

Recycled content by value 20% excluding mechanical & electrical (‘M&E’)

30%

Re-used content by value 1% excluding M&E 11.49%

Renewable content by value (£) Where possible 3.12%

Procurement and manufacturing of materials within 500 miles by value

20% excluding M&E 49.62%

Materials sourced within 500 miles by value (£)

10% excluding M&E 19.56%

FSC/PEFC Timber 100% 100%

Construction waste diverted from land!ll (BREEAM target)

75% by weight 92% by weight

From initiating the building and design process, Catlin has developed a set of environmental requirements for all their new of!ces globally, some of which focus on the day to day operations of its buildings. These standards apply to:

energy ef!ciency;waste minimisation/recycling; andfood sources.

Catlin also focuses on its IT and communications systems to reduce carbon emissions. During 2011 Catlin increased the use of virtualisation technology in its data centres, which has allowed the number of servers to be substantially expanded without increasing power usage. Catlin has also replaced graphic screensavers on personal computer monitors in all of!ces with plain black screensavers, which has reduced processor energy consumption.

Catlin Group Limited Environmental Policy StatementCatlin Group Limited is an international specialist property and casualty insurer and reinsurer with more than 50 of!ces worldwide. Catlin understands its duty to the environment and endeavours to improve and minimise its environmental impact, whilst working with its partners and other counterparties to embrace a more sustainable future.

Catlin looks for innovative and creative ways to help protect the environment and to promote study of potential environmental changes. In recognition of the serious implications that climate change and other environmental concerns may pose for the insurance industry, its policyholders and all of society, Catlin for three years sponsored the Catlin Arctic Survey, whose aim has been to obtain the impartial scienti!c data required to make more reliable conclusions about the potential impact of changes to the environment. Catlin is renewing its commitment to the environment by sponsoring the Catlin Seaview Survey which, among other things, focuses on effects of climate change and ocean acidi!cation on coral reefs.

It is in this context that Catlin is committed to the continuous improvement of its sustainability performance and endeavours to:

continually improve our direct impacts on the environment;measure, monitor and seek to reduce our carbon footprint;report our environmental impacts through the appropriate forums, such as the Carbon Disclosure Project;strive to reduce carbon costs effectively through a minimisation programme;continue to actively engage with the insurance industry through Climatewise; continue to review opportunities to advance scienti!c understanding of climate-related issues as appropriate; andadopt and meet all relevant legislative requirements.

Catlin regularly reviews its sustainability record at meetings of the Group Sustainability Committee, which reports directly to the Group Executive Committee. The Group will publicly report on its sustainability practices on an annual basis, allowing for a process of transparency.

The Catlin Group Limited Board of Directors endorses this policy statement and is fully committed to its implementation. This policy statement will be regularly reviewed and updated as necessary.

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Environment sponsorship/participationCatlin’s ongoing participation in environmental projects and programmes include:

the Catlin Arctic Survey;the Catlin Seaview Survey;Ocean Education; and ClimateWise.

Catlin Arctic SurveyCatlin was the primary sponsor of the Catlin Arctic Survey, a three-year project designed to help scientists obtain crucial, impartial data to make more reliable conclusions about the impact of climate change and other changes to the environment and the new risks they could create.

Systemic changes in our environment could create new types of risk and therefore have signi!cant consequence for insurers and reinsurers such as Catlin. Signals that our environment may be changing can often be found in the Arctic. However, the hostile Arctic environment makes it dif!cult for scientists to obtain the !rst-hand data they need to predict future changes.

The Catlin Arctic Survey facilitates that crucial data gathering by teaming experienced Arctic explorers and guides, who are accustomed to the harsh conditions, with leading research scientists from institutions in the United Kingdom, Europe, the United States and Canada.

2009 Catlin Arctic SurveyThe !rst Catlin Arctic Survey sought to determine when the Arctic Ocean’s sea ice cover would no longer remain a year-round surface feature of the Earth. Three explorers trekked more than 400 kilometres across the Arctic sea ice, taking thousands of measurements and observations over a ten-week period.

This data was collected and analysed by research partners in the Polar Ocean Physics Group at the University of Cambridge, which concluded there is a signi!cant probability that, within ten years, only 20 per cent of the Arctic Ocean basin will have sea ice cover during summers.

2010 Catlin Arctic SurveyThe 2010 Survey studied the effects of carbon dioxide on the Arctic Ocean.

When CO2 dissolves in seawater it forms a weak acid. The survey studied whether the rate at which atmospheric carbon dioxide is increasing has led to increased ocean acidi!cation. Because cold water absorbs CO2 more effectively than warm water, the Arctic Ocean serves as an early warning indicator for the rest of the planet.

Three explorers again trekked more than 400 kilometres across the Arctic sea ice, collecting water samples and measuring sea ice thickness. This research was supplemented by work by research scientists and Arctic guides at the purpose-built Catlin Ice Base, located on the sea ice off Ellef Rignes Island in far northern Canada.

Scienti!c !ndings resulting from the research carried out by the 2010 Catlin Arctic Survey are expected to be published in 2012.



The Catlin Seaview Survey will draw on the experience of some of the world’s leading authorities on oceanography and climate change, with Ove Hoegh-Guldberg, Director of the Global Change Institute at The University of Queensland, serving as Chief Scientist.

Professor Hoegh-Guldberg stressed that the visual nature of the project should help bridge the gap between scienti!c knowledge and public awareness. He said:

“The Catlin Seaview Survey comprises a series of studies which will reveal to the public one of the last frontiers on Earth, the oceans. For the !rst time in history, we have the technology available to broadcast the !ndings of the expedition through Google. Millions of people will be able to experience the life, the science and the magic that exists under the surface of our oceans. This project is very exciting.”

More information regarding the Catlin Seaview Survey is available at www.catlinseaviewsurvey.com.

Ocean EducationCatlin is the sponsor of Ocean Education, an internet-based educational programme designed to help UK teachers explain to students the changes now occurring in the earth’s oceans.

ClimateWiseCatlin participates in ClimateWise, collaborative insurance initiative through which members aim to work together to respond to the myriad risks and opportunities of climate change.

In 2007 Catlin Underwriting Agencies Limited (‘CUAL’), the Catlin subsidiary which manages the Catlin Syndicate at Lloyd’s, joined ClimateWise, which is supported by various organisations participating in the UK insurance sector, including Lloyd’s and the Association of British Insurers. By joining ClimateWise, insurance companies such as Catlin agree to embed six principles in their business activities:

lead in risk analysis;inform public policy-making;support climate awareness amongst customers; incorporate climate change into investment strategies; reduce the environmental impact of their own business; andreport and be accountable.

ClimateWise participants are required to report annually on their compliance with a set of principles to reduce society’s long-term risk from climate change. CUAL, along with other companies with operations at Lloyd’s, now report jointly through Lloyd’s. Information about the Lloyd’s market’s participation in ClimateWise is available at: www.lloyds.com/Lloyds/Corporate-Responsibility/Environment/ClimateWise/Our-progress.

2011 Catlin Arctic SurveyThe third Catlin Arctic Survey focused on how changes in the Arctic Ocean might impact deepwater ocean currents. Changes in these currents, among other things, could signi!cantly alter weather patterns globally.

The amount of fresh water entering the Arctic Ocean is increasing from melting sea ice and glaciers, additional rainfall and river runoff. The 2011 Catlin Arctic Survey studied whether these phenomena could affect currents in the Atlantic Ocean, potentially leading to rising sea levels on the Eastern seaboard of North America and altering prevailing weather patterns on both sides of the Atlantic.

Research was conducted through samples taken by a team of explorers trekking across the Arctic sea ice as well as through experiments by scientists working at the Catlin Ice Base.

Whilst Catlin’s sponsorship of the Catlin Arctic Survey ended with the 2011 survey, Catlin will remain involved with the publication and distribution of the scienti!c !ndings from both the 2010 and 2011 surveys.

More information about the Catlin Arctic Surveys in available at www.catlinarcticsurvey.com.

Catlin Seaview SurveyThe Catlin Seaview Survey, which will commence in September 2012, is a scienti!c expedition along the length of the Great Barrier Reef which will gather scienti!c facts regarding the impact of climate change and ocean acidi!cation on coral reefs as well as study the reefs’ environment, marine life and science.

The Catlin Seaview Survey will include three separate surveys:

Shallow reef survey. The shallow reef survey will use a custom-designed underwater vehicle with a 360-degree camera to generate imagery of the reef. In collaboration with The University of Queensland, these images will be assessed using image recognition software to enable a rapid visual census of corals, !sh and many other organisms at 20 sites across the entire length of the 2,300km Great Barrier Reef. This will provide a broad-scale baseline for understanding climate change on coral reefs.Deep-water survey. Using diving robots, the deep-water survey will explore the reef at depths of 30 to 100 metres. Little is known of the Great Barrier Reef at these depths, yet they may hold some of the secrets as to whether the coral reefs will survive rapid climate change. The survey will be conducted using a combination of high-de!nition cameras, deep-diving robots and survey equipment.Mega-fauna survey. The mega-fauna survey team, led by Emmy Award-winning cinematographer and shark researcher Richard Fitzpatrick, will study the migratory behaviour of tiger sharks, green turtles and manta rays in response to increasing seawater temperatures. A total of 50 animals will be tracked with satellite tags that continuously monitor their geographic position, temperature and depth. This data can then be compared against oceanographic data to get a better understanding of the animals’ behaviour and migratory responses to the warming of the oceans.

Google is collaborating with the Catlin Seaview Survey and is working on a new feature on Panoramio (a Google platform which links photos to locations), so that the 360-degree panoramic images can be uploaded and made available to millions of people worldwide. Approximately 50,000 panoramas from the Catlin Seaview Survey will eventually be accessible on Google Earth and Google Maps. The project will also have a dedicated YouTube channel and the ability to broadcast ‘Hangouts’, which allows people to watch live streams of the expedition team from the ocean "oor.

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The 2011 Catlin Arctic Survey again featured work done over a six-week period at the Catlin Ice Base on the Arctic sea ice by research scientists specially trained to cope with the hostile environment. Contributing to their work were two expeditions by trained Arctic explorers who gathered samples to complement those taken at the Ice Base. Details of the speci!cs of the 2009, 2010 and 2011 Catlin Arctic Surveys can be found on page 56.

The 2011 Catlin Arctic Survey – like the previous expeditions – received widespread print, online and broadcast media coverage before, during and after the survey. Most notably, CNN interviewed the participating explorers in what is believed to be the !rst live broadcast from the North Geographic Pole. CNN’s Philippe Cousteau later presented several broadcasts from the Catlin Ice Base, including a satellite telephone interview with Catlin Group Chief Executive Stephen Catlin in London.

The coverage arising from the Catlin Arctic Survey has been invaluable in raising awareness of Catlin in the United States and around the world.

Whilst 2011 marked the !nal Catlin Arctic Survey expedition for the time being, additional media coverage is anticipated during 2012 and beyond as the scienti!c !ndings from the 2010 and 2011 surveys are published.

More information about the Catlin Arctic Survey is available at www.catlinarcticsurvey.com.

Walking With the Wounded In parallel with its support for the Catlin Arctic Survey, the Group in 2011 was a sponsor of the expedition to the North Geographic Pole organised by Walking With the Wounded, a charity that raises funds for wounded members of the British Armed Forces. As part of the expedition, four wounded servicemen, two of whom are amputees, trekked 160 miles to the North Geographic Pole.

The expedition received substantial coverage from UK broadcast, online and print media due to the nature of the mission and because HRH Prince Harry, the patron of Walking With the Wounded, joined

The Catlin BrandCommunicating Catlin Around the World

SummaryCatlin uses various tools to build its brand, including sponsorship, online communications and advertisingCatlin continues to focus on environmental projects as a global marketing strategyThe Catlin Art Prize has developed into a leading event in the UK !ne art communityThe Group has strengthened its online presence in 2011 and will continue to expand web-based activities in 2012

Catlin has developed a distinctive brand that is increasingly recognised by clients and brokers globally.

Catlin believes that it is crucial that the Group maintains a uniform brand across its six underwriting hubs and 55 of!ces worldwide. The brand is managed by a Group Marketing & Communications department based in London, which sets standards for use by employees in the underwriting hubs. The Marketing & Communications department is also responsible for Group- wide branding and sponsorship activities.

Catlin uses a combination of strategies and tools to build its brand and to promote the Group’s global activities, including:

sponsorship;online communications; andadvertising.

In addition, the Group receives signi!cant promotional bene!ts from many of the Corporate Responsibility activities in which it participates. For instance, in Bermuda, Catlin has increased awareness of its brand through sponsorship of the Catlin End to End fundraising event and the Bermuda Football Association’s National Academy programme.

SponsorshipCatlin Arctic SurveyThe Catlin Arctic Survey in 2011 continued to be the centrepiece of Catlin’s marketing/brand-building activities.

Catlin’s three-year sponsorship of the Survey has allowed scientists to obtain the impartial data necessary to make more reliable conclusions about the impact of climate change and other changes to the environment. As an insurer and reinsurer that underwrites coverage for large-scale and complex risks, it is appropriate that Catlin provide funding for research the will help identify emerging risks.


The Catlin Art Prize which was established in 2007

www.catlin.comThe complete redesign of www.catlin.com

the expedition for several days. Extensive media coverage depicted Prince Harry and the veterans wearing the Catlin logo on their parkas.

Catlin is also a sponsor of Walking With the Wounded’s 2012 expedition, in which a group of wounded servicemen will attempt to scale Mount Everest.

‘Scott’s Last Expedition’Catlin is the sponsor of ‘Scott’s Last Expedition’, an exhibition at the Natural History Museum in London that explores the ill-fated Antarctic expedition led by Captain Robert Falcon Scott 100 years later.

The exhibition, which runs through 2 September 2012, focuses not only on the well-known facts regarding the expedition, but also on the remarkable scienti!c achievements of the expedition which includes signi!cant data collection, a story that has been largely untold.

As title sponsor of the exhibition, the Catlin logo is prominently displayed at both the exhibition itself and on external advertising by the Natural History Museum in local media and on public transportation. Catlin will also hold various client and employee events at the museum in conjunction with the exhibition.

Catlin Art PrizeThe Catlin Art Prize, which was established in 2007, continues to grow in prestige. The prize, which recognises the talents of recent graduates from UK art schools and provides an arena in which to showcase their development, not only attracts considerable media attention, but also effectively promotes the Group’s Specie/Fine Art underwriting team. Catlin is one of the world’s leading insurers of art galleries, dealers and collectors.

Concurrently with the Catlin Art Prize, Catlin publishes ‘The Catlin Guide’, a highly anticipated annual overview of new British art which includes pro!les of 40 of the most promising new graduate artists in the United Kingdom. The shortlist for the Catlin Art Prize is selected from the artists whose work appears in ‘The Catlin Guide’.

Media coverage of the Catlin Art Prize and ‘The Catlin Guide’ has increased markedly in the past year as they have become permanent !xtures in the London art community. The release of the latest edition of ‘The Catlin Guide’ in January 2012 was covered by UK daily newspapers, the BBC and various art trade journals including The Art Investor, Spoonfed and Rise Art. Bespoke Twitter and Facebook sites have also been established for the prize and the guide.

OnlineCatlin believes that a company’s presence on the internet is crucial to successful brand-building. An online team, part of the Marketing & Communications function, is responsible for developing the Group’s online communications strategy as well as building and maintaining the websites Catlin uses to communicate with brokers, clients and investors.

A primary focus during 2011 was the complete redesign of Catlin.com, the Group’s primary website which serves as a portal for other sites. The new site, which was unveiled in June, received positive feedback from brokers and clients and won the 2011 award bestowed by the UK Investor Relations Society for the best website by a FTSE 250 company.

In line with the Group’s increasingly international focus, Catlin has created bespoke websites for all six underwriting hubs as well as a special website for Latin American clients. To reaf!rm Catlin’s position as a local insurer, the Europe website has been translated into various languages, including Dutch, French, German, Italian, Norwegian and Spanish. The Asia-Paci!c site is available in Mandarin, whilst the Latin American site has Portuguese and Spanish versions.

Catlin has established websites for brokers that relate to individual classes of business, such as Cargo, Life, Fleet Motor and Fine Art/Specie. Catlin in London also has established a website through which brokers can view the availability of underwriters and claims managers.

AdvertisingCatlin targets its advertising to audiences in the insurance industry through trade journals and insurance-related websites. A large part of Catlin’s advertising activity is concentrated in the United States to support the continued development of Catlin US.

Catlin developed two principal ad campaigns during 2011:

A campaign linked to the Catlin Arctic Survey which linked the commitment of participating explorers and scientists to that of Catlin’s underwriters and claims professionals.A campaign that highlighted personal accomplishments of US brokers who place business with Catlin.

The Group also buys tactical advertising placements to promote particular products or initiatives. For instance, the London broker service initiative launched in 2011 was featured in ads in UK-based insurance publications.

Scott’s Last ExpeditionAn exhibition at the Natural History Museum

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A full listing of Catlin’s websites

can be found on the inside back cover

of this report.

60 Financial Review Catlin Group Limited Annual Report and Accounts 2011

“ Transparency in financial data provides clients, brokers, regulators and investors with confidence that the information presented is complete and understandable. Transparent financial information enables brokers, policyholders and shareholders to make truly informed decisions about a company.”

Susana AlvesChief Financial Officer – Catlin BermudaBermuda

What I DoSusana Alves

As part of my responsibilities, I must ensure that !nancial disclosures are complete and accurate. I work as a member of a team with Catlin employees from around the world. The work we do may seem like a tedious task, but my team realises how important this information is to our investors.

Susana AlvesChief Financial Officer Catlin Bermuda

FunctionFinance

HubBermuda

OfficeBermuda

BirthplaceMontreal

Joined Catlin2007

61Financial ReviewCatlin Group Limited Annual Report and Accounts 2011

Financial ReviewCatlin’s Performance Measured

The following pages contain commentary regarding Catlin’s consolidated financial statements for the year ended 31 December 2011, which are prepared in accordance with Accounting Principles Generally Accepted in the United States (‘US GAAP’).

Consolidated Results of Operations US$m Table 2 2011 2010 % change

Revenues

Gross premiums written 4,513 4,069 11%

Reinsurance premiums ceded (678) (751) (10%)

Net premiums written 3,835 3,318 16%

Change in net unearned premiums (223) (99) 125%

Net premiums earned 3,612 3,219 12%

Net investment return 248 205 21%

Change in fair value of catastrophe swaps – (15) N/M

Net gains on foreign currency 9 3 200%

Other income 4 2 100%

Total revenues 3,873 3,414 13%

Expenses

Losses and loss expenses 2,529 1,852 37%

Policy acquisition costs 759 684 11%

Administrative and other expenses 504 457 10%

Financing costs 10 15 (33%)

Total expenses 3,802 3,008 26%

Income before income taxes 71 406 (83%)

Income tax bene!t/(expense) 11 (25) N/M

Net income 82 381 (78%)

Preferred share dividend (44) (44) –

Net income available to common stockholders 38 337 (89%)

Loss ratio1 70.0% 57.5%

Expense ratio2 32.6% 32.3%

Combined ratio3 102.6% 89.8%

Tax rate4 (15.6%) 6.3%

Return on net tangible assets5 1.7% 16.3%

Return on equity6 1.3% 12.5%

Total investment return7 3.1% 2.7%

N/M Not meaningful1 Calculated as losses and loss expenses divided by net premiums earned2 Calculated as the total of policy acquisition costs, controllable and non-

controllable expenses divided by net earned premiums; corporate expenses representing pro!t-related bonus, employee share option schemes and certain Group corporate costs are not included in the calculation

3 Total of loss ratio plus expense ratio4 Calculated as income tax expense divided by income before income taxes5 Calculated as net income available to common stockholders divided by net

tangible assets (opening stockholders’ equity (excluding preferred shares) adjusted for capital issued during the year less intangible assets and associated deferred tax)

6 Calculated as net income available to common stockholders divided by opening stockholders’ equity (excluding preferred shares) adjusted for capital issued during the year

7 Calculated as total investment income divided by average invested assets during the year

Catlin’s income before tax amounted to US$71 million in 2011, an 83 per cent reduction compared with the previous year (2010: US$406 million). This result was in"uenced by several key factors:

An 11 per cent increase in gross premiums written to US$4.5 billion.A 12 per cent increase in net premiums earned to US$3.6 billion.A 53 per cent decrease in net underwriting contribution to US$324 million, re"ecting US$961 million of gross catastrophe losses (US$678 million net of reinsurance and reinstatement premiums) (2010: US$235 million gross; US$218 million net of reinsurance and reinstatement premiums).A loss ratio of 70.0 per cent, higher than the previous year (2010: 57.5 per cent) due to the catastrophe losses incurred during 2011. The attritional loss ratio of 50.0 per cent was the lowest since 2007 (2010: 51.6 per cent).An investment return of 3.1 per cent (2010: 2.7 per cent).

Consolidated Results of OperationsAn analysis of income before income taxes is shown in Table 1. A summary of the Consolidated Results of Operations appears in Table 2.

Income before income taxes US$m Table 1

2011 2010 % change

Net underwriting contribution 324 683 (53%)

Total investment return 256 212 21%

Administrative expenses – controllable (352) (289) 22%

Administrative expenses – non-controllable (68) (67) 1%

Administrative expenses – corporate (84) (101) (17%)

Financing and other (14) (35) (60%)

Foreign exchange 9 3 200%

Income before income taxes 71 406 (83%)

Financial Review


Financial Review continued

The following commentary compares the Group’s 2011 !nancial results with the results for 2010.

With the exception of administrative expenses, the impact of year-to-year changes using constant exchange rates is insigni!cant. The impact on administrative expenses is explained in the analysis of the expense ratio.

Gross premiums writtenGross premiums written by the Group’s Bermuda, US, Asia-Paci!c, European and Canadian underwriting hubs increased substantially, rising by 24 per cent to US$2.2 billion (2010: US$1.7 billion). These underwriting hubs accounted for 48 per cent of the total gross premiums written by the Group (2010: 43 per cent).

Gross premiums written by the London/UK underwriting hub increased by 1 per cent to US$2.34 billion (2010: US$2.32 billion).

Rates increased slightly during the period for many classes of business following the record number of catastrophe events during the year, with average weighted premium rates rising by 2 per cent. Rates for catastrophe-exposed classes of business increased by a weighted average of 4 per cent, whilst average weighted premium rates for non-catastrophe classes were "at.

Seventy-three per cent of gross premiums written were denominated in US dollars, 10 per cent in euros, and 17 per cent in sterling and other currencies.

The !ve-year growth in the Group’s gross premiums written is shown in Chart 3.

Growth in gross premiums written US$m Chart 3

20112010200920082007

5,000

4,000

3,000

1,000

0

2,000

$3,361 $3,437$3,715

$4,069

$4,513

ReinsuranceReinsurance premiums ceded decreased by US$73 million to US$678 million (2010: US$751 million). Reinsurance premiums ceded are analysed in Table 4.

Reinsurance premiums ceded US$m Table 4

2011Percentage

of GPW 2010Percentage

of GPW

Third-party protections 678 15.0% 753 18.5%

Names’ quota share – 0.0% (2) 0.0%

Reinsurance premiums ceded 678 15.0% 751 18.5%

Element of multi-year contracts relating to future periods (25) (0.6%) (76) (1.9%)

Adjusted reinsurance premiums ceded 653 14.4% 675 16.6%

Third-party reinsurance costs expressed as a percentage of written premiums were 3.5 percentage points lower than in 2010. The decrease was attributable to the purchase of fewer contracts. In addition, a number of these contracts provide coverage for 2011 and future years. The element of the multi-year contracts which relates to future periods was approximately US$25 million in 2011 (2010: US$76 million).

Net premiums earnedNet premiums earned increased by 12 per cent to US$3.6 billion (2010: US$3.2 billion). This increase, which was in line with the Group’s expectations, was due to both the increase in gross premiums written and the reduction in reinsurance premiums ceded during 2011.

The !ve-year growth in net premiums earned is shown in Chart 5.

Growth in net premiums earned US$m Chart 5

20112010200920082007

5,000

4,000

3,000

1,000

0

2,000

$2,490 $2,596

$2,918

$3,219

$3,612


Losses and loss expensesThe Group’s loss ratio increased to 70.0 per cent during 2011 (2010: 57.5 per cent) on account of the unprecedented series of natural catastrophe losses sustained during the year.

The Group incurred eight catastrophe losses in 2011:

Australian "oods in January;the New Zealand earthquake in February;the Japan earthquake/tsunami in March;tornadoes which caused extensive damage in portions of the US Midwest and South in April and May;severe storms in Copenhagen in July;Hurricane Irene, which caused damage to portions of the Caribbean, United States and Canada in August; andthe Thai "oods which occurred throughout the second half of 2011.

Gross losses relating to these catastrophe losses amounted to approximately US$961 million ($678 million net of reinsurance and reinstatement premiums), impacting the loss ratio by 21.3 percentage points.

The increase in the Group’s loss ratio during 2011 is analysed in Table 6.

Analysis of loss ratio Table 6

2011 2010

Attritional loss ratio 50.0% 51.6%

Catastrophe losses 21.3% 7.2%

Large single-risk losses 1.5% 3.2%

Release of reserves (2.8%) (4.5%)

Reported loss ratio 70.0% 57.5%

Large single-risk losses impacted the loss ratio by 1.5 percentage points in 2011 (2010: 3.2 percentage points).

The Group released US$103 million from prior year loss reserves during 2011, an amount equating to 2 per cent of opening reserves (2010: US$144 million or 3 per cent). The level of reserve releases made has been broadly consistent since the Group’s initial public offering in 2004.

Net underwriting contributionThe 2011 net underwriting contribution of US$324 million represents a 53 per cent decrease compared with the previous year (2010: US$683 million). Of the total underwriting contribution, 74 per cent was produced by the London/UK underwriting hub; 26 per cent was produced by the Group’s other underwriting hubs (2010: 54 per cent London, 46 per cent other). However, if the impact of catastrophe losses is excluded, 55 per cent of the underwriting contribution was produced by the London/UK underwriting hub (2010: 53 per cent), with 45 per cent produced by the other hubs (2010: 47 per cent).

Policy acquisition costs, administrative and other expensesThe expense ratio amounted to 32.6 per cent (2010: 32.3 per cent). The components of the expense ratio and corporate expenses are analysed in Table 7.

Analysis of expense ratio US$m Table 7

2011

Components of expense

ratio 2010

Components of expense

ratio

Policy acquisition costs 759 21.0% 684 21.3%

Administrative expenses

Controllable expenses 352 9.7% 289 9.0%

Non-controllable expenses 68 1.9% 67 2.0%

Corporate expenses 84 – 101 –

Administrative and other expenses 504 11.6% 457 11.0%

1,263 32.6% 1,141 32.3%

The policy acquisition cost ratio decreased to 21.0 per cent (2010: 21.3 per cent). Administrative expenses represent 11.6 percentage points of the overall expense ratio (2010: 11.0 percentage points). Approximately 0.3 percentage points of the increase in 2011 is attributable to foreign exchange movements as a result of converting sterling expenses into US dollars at an average rate of US$1.60 in 2011 compared to US$1.55 in 2010.

When calculating the expense ratio, Catlin excludes some corporate expenses such as pro!t-related bonuses, employee share option schemes and certain Group corporate costs to allow the expense and combined ratios to provide a closer representation of the costs of underwriting.

Total investment returnTotal investment return amounted to 3.1 per cent (2010: 2.7 per cent). Table 8 summarises the total investment return during the year.

Total investment return US$m Table 8

2011 2010

Total investments and cash as at 31 December 8,388 8,021

Investment income 156 147

Net gains on !xed maturities and short-term investments 102 46

Net (losses)/gains on other invested assets (2) 19

Total investment return 256 212

Investment expenses (8) (7)

Net investment return 248 205

Financial Review


Financial Review continued

Change in fair value of catastrophe swapsDuring 2010 the Group held a catastrophe swap which provided coverage in the event of one or more natural catastrophes. The Group’s counterparty in the catastrophe swap was Newton Re, a special purpose vehicle. The catastrophe swap expired during 2010 without being triggered. No catastrophe swaps were held at 31 December 2011 and 2010.

The change in fair value of these swaps is shown in Table 9.

Change in the fair value of derivatives US$m Table 9

2011 2010

Premiums in respect of catastrophe swaps – (14)

Change in value of catastrophe swaps – (1)

– (15)

Net gains on foreign currencyCatlin reported a gain on foreign currency exchange amounting to US$9 million (2010: US$3 million). Catlin reports in US dollars but undertakes signi!cant transactions in various currencies. Exchange rate movements during the year have resulted in the net exchange gain on these currency positions.

Financing costsFinancing costs amounted to US$10 million (2010: US$15 million). Financing costs comprise interest and other costs in respect of bank !nancing, together with costs of subordinated debt. Dividends relating to preferred shares are treated as an appropriation of net income and are not included in !nancing costs.

Income taxThe Group’s effective tax rate was negative 15.6 per cent (2010: 6.3 per cent). A driver of the effective tax rate continues to be the jurisdiction of the underwriting entities in which pro!ts and losses arise.

The negative tax rate arises due to a $19 million deferred tax bene!t, attributable to a 2 per cent reduction in the UK corporation tax rate to 25 per cent which will be applicable from April 2012. The effect of this change is re"ected in the deferred tax provisions made for 2011.

Net income available to common stockholdersAfter payment of dividends amounting to US$44 million to holders of Catlin’s non-cumulative perpetual preferred shares (2010: US$44 million), net income available to common shareholders amounted to US$38 million (2010: US$337 million). The return on net tangible assets was 1.7 per cent (2010: 16.3 per cent); the return on equity amounted to 1.3 per cent (2010: 12.5 per cent).

Balance sheetA summary of the balance sheet at 31 December 2011 and 2010 is set out in Table 10.

Summary of Consolidated Balance Sheet US$m Table 10

2011 2010 % change

Investments and cash 8,388 8,021 5%

Intangible assets and goodwill 717 716 –

Premiums and other receivables 1,679 1,322 27%

Reinsurance recoverable 1,188 1,039 14%

Reinsurance recoverable on paid losses 29 190 (85%)

Deferred policy acquisition costs 398 354 12%

Other assets 560 440 27%

Loss reserves (6,467) (5,549) 17%

Unearned premiums (2,119) (1,886) 12%

Subordinated debt (91) (93) (2%)

Reinsurance payable (415) (559) (26%)

Other liabilities (569) (547) 4%

Stockholders’ equity 3,298 3,448 (4%)

The major items on the balance sheet are analysed below.

Investments and cashInvestments and cash increased by 5 per cent to US$8.4 billion (2010: US$8.0 billion). The increase is driven by cash "ow from the Group’s insurance operations and positive investment performance.

Intangible assets and goodwillIn line with management’s focus on underwriting hubs, intangible assets have been attributed to segments to match those assets to relevant business "ows.

Table 11 sets out the principal components of this asset.

Intangible assets and goodwill US$m Table 11

2011 2010

Purchased Lloyd’s syndicate capacity 634 634

Distribution network – 1

Admitted lines licences 6 5

Goodwill on acquisition of Wellington 60 60

Other goodwill 17 16

Intangible assets and goodwill 717 716

Associated deferred tax (included within other liabilities) (108) (94)

Intangible assets and goodwill net of deferred tax 609 622


Premiums and other receivablesPremiums and other receivables increased during 2011 by 27 per cent to US$1.7 billion (2010: US$1.3 billion). The increase was due to the increase in gross premiums written, including a signi!cant amount of reinstatement premiums arising as a result of the catastrophe losses incurred in the year.

Reinsurance recoverableAmounts receivable from reinsurers increased by 14 per cent to US$1.2 billion (2010: US$1.0 billion). Reinsurance recoverables represent 36 per cent of stockholders’ equity (2010: 30 per cent).

Reinsurance recoverable on paid lossesAnticipated recoveries decreased by 85 per cent to US$29 million (2010: US$190 million) following a commutation and settlement of the quota share reinsurance provided to the Catlin Syndicate at Lloyd’s (Syndicate 2003) by the former Wellington Names for the 2008 underwriting year of account.

Deferred policy acquisition costsDeferred policy acquisition costs represented 19 per cent of unearned premiums at 31 December 2011 (2010: 19 per cent).

Loss reservesGross loss reserves have increased by 17 per cent to US$6.5 billion (2010: US$5.5 billion). Approximately 95 per cent of net reserves relate to the 2003 and later accident years. The Group released US$103 million from prior year loss reserves during 2011, an amount equal to approximately 2 per cent of opening net reserves.

Unearned premiumsUnearned premiums increased by 12 per cent to US$2.1 billion (2010: US$1.9 billion). The increase in unearned premiums is the result of Catlin’s growth in gross premiums written in recent years.

Notes payable and subordinated debtSubordinated debt represented a total of US$68 million and €18 million in variable rate unsecured subordinated notes. The interest payable on the notes is based on market rates for three-month deposits in US dollars plus a margin of up to 317 basis points. The notes, which were redeemable in 2011 at the earliest, qualify as ‘Lower Tier II’ capital under the rules of the Financial Services Authority in the UK.

There was no change to the subordinated debt during the year, and the balance sheet movement primarily represented foreign exchange revaluation.

Reinsurance payableReinsurance payable has decreased by 26 per cent to US$415 million (2010: US$559 million). This decrease relates to the commutation and settlement of the quota share reinsurance of the Catlin Syndicate provided by the former Wellington Names.

Stockholders’ equityTable 12 shows the principal components of the change in stockholders’ equity during 2011 and 2010.

Change in stockholders’ equity US$m Table 12

2011 2010

Stockholders’ equity, 1 January 3,448 3,278

Net income 82 381

Other comprehensive (loss)/gain (42) 5

Common share dividends declared (150) (138)

Preferred share dividends declared (44) (44)

Stock compensation and other 4 (34)

Stockholders’ equity, 31 December 3,298 3,448

The other comprehensive loss is largely comprised of currency translation losses. These result from the signi!cant portion of the Group’s stockholders’ equity being represented by non-US dollar entities within the Group. Non-US dollar entities such as the Catlin Syndicate, Catlin UK and certain intermediate holding companies, comprised a signi!cant portion of Catlin’s consolidated stockholders’ equity. A currency translation loss arises when the net assets of these companies are translated at year-end into the Group’s reporting currency, which is US dollars.

In January 2007 Catlin Bermuda issued US$600 million of non-cumulative perpetual preferred shares. Dividends are paid semi-annually at a rate of 7.249 per cent up to 2017 when there is a 100 basis point step-up in the interest cost based on LIBOR at that time. These shares represent a capital instrument which is eligible as regulatory capital for Catlin Bermuda.

The amount attributable to preferred shareholders is US$590 million such that the per-share amounts attributable to common shareholders are as set out in Table 13.

Net tangible assets US$m Table 13

2011 2010

Total stockholders’ equity 3,298 3,448

Less: attributable to preferred shares (590) (590)

2,708 2,858

Less: intangible assets (net of deferred tax) (609) (622)

Net tangible assets 2,099 2,236

Book value per share (US$) $7.85 $8.34

Book value per share (sterling) £5.06 £5.41

Net tangible assets per share (US$) $6.08 $6.53

Net tangible assets per share (sterling) £3.93 £4.24

Financial Review


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; andloss 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 in"ation;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; andchanges 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 re"ected 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 recoveriesThe 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 expensesCatlin 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 pro!les.

The loss reserve triangles in Tables 3 and 4 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 2011 for the Group’s functional currencies to remove the distorting effect of changing rates of exchange as far as possible.

Wellington acquisitionThe 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.


HighlightsIn aggregate, across most accident years, reserves have developed slightly better than the assessments made at the previous year-end. The reserves from the 2002 and prior accident years represent 4 per cent of the Group’s net reserves at 31 December 2011.A summary of the Group’s net reserves is shown in Table 1.

Summary of Catlin Group net reserves at 31 December 2011 US$m Table 1

Accident yearCatlin net reserves

Legacy Wellington net

reservesTotal net reserves

Percentage of total net

reserves

2002 and prior 79 126 205 4%

2003 36 57 92 2%

2004 39 62 101 2%

2005 61 97 157 3%

2006 72 114 186 4%

2007 265 18 283 5%

2008 437 3 440 8%

2009 852 – 852 16%

2010 1,071 – 1,071 20%

2011 1,810 – 1,810 34%

Sub-total 4,721 476 5,197 98%

Other net reserves1 83 2%

Total net reserves 5,279 100%

1 Other net reserves include unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and Life business

The events included in the major events sections of the development tables (Tables 3 and 4 on pages 68 and 69) are listed in Table 2.

Major events Table 2

Accident year Event

2002 and prior World Trade Center/US Terrorism 9/11

2004 Hurricane Charley

2004 Hurricane Frances

2004 Hurricane Ivan

2004 Hurricane Jeanne

2005 Hurricane Katrina

2005 Hurricane Rita

2005 Hurricane Wilma

2008 Hurricane Ike

2010 Chilean Earthquake

2010 Deepwater Horizon

2010 New Zealand Earthquake, Dar!eld

2010 Australian Floods, Central Queensland

2011 Australian Floods, Brisbane

2011 New Zealand Earthquake, Christchurch

2011 Japanese Earthquake

2011 Tuscaloosa Tornadoes

2011 Joplin Tornado

2011 New Zealand Earthquake, Sumner

2011 Hurricane Irene

2011 Danish Cloudburst

2011 Thai Floods

The major event component of Wellington for accident periods prior to the business combination are not included in the major event estimates shown in Tables 3 and 4.

Commentary on development tablesNon-major events: Across the 2007 and prior years, in aggregate, there has been a small release from reserves. For the 2008 to 2010 accident years, reserve releases have resulted from a review of some of the assumptions used relating to the Casualty and Workers Compensation classes of business. The 2010 accident year has also bene!ted from better than anticipated development on Aerospace reserves.Major events: Aggregate reserves for prior year major events have seen a small improvement.

LimitationsEstablishing 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 tables above provides a historical perspective on the changes in the estimates of the claims liabilities established in previous years and the estimated pro!tability of recent years, readers are cautioned against extrapolating future surplus or de!cit on the current reserve estimates. The information may not be a reliable guide to future pro!tability as the nature of the business written might change, reserves may prove to be inadequate, the reinsurance programme may be insuf!cient 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 signi!cant adjustments to the amounts provided. There is a risk that, due to unforeseen circumstances, the reserves carried are not suf!cient to meet ultimate liabilities.

The accident year triangles were constructed using several assumptions and allocation procedures which are consistent with underlying premium earning pro!les. 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.

Financial Review


Loss Reserve Development continued

Estimated ultimate net losses US$m Table 3

Accident year

Wellington accident

periods 2006 and prior

2002 and prior 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

Net premiums earned 929 1,167 1,199 1,348 2,740 2,545 2,914 3,203 3,612

Net ultimate excluding major eventsInitial estimate1 5,943 1,545 424 544 588 632 1,372 1,542 1,814 1,681 1,766One year later 5,915 1,563 408 480 532 591 1,429 1,511 1,774 1,652Two years later 5,823 1,575 380 458 490 577 1,406 1,502 1,763Three years later 5,829 1,616 380 432 469 562 1,393 1,477Four years later 5,741 1,630 369 421 464 556 1,398Five years later 5,732 1,633 367 427 457 556Six years later 1,645 370 418 460Seven years later 1,637 358 412Eight years later 1,635 354

Net ultimate loss ratio excluding major eventsInitial estimate1 45.6% 46.6% 49.0% 46.9% 50.1% 60.6% 62.2% 52.5% 48.9%One year later 43.9% 41.1% 44.4% 43.8% 52.2% 59.4% 60.9% 51.6%Two years later 40.9% 39.3% 40.9% 42.8% 51.3% 59.0% 60.5%Three years later 40.9% 37.0% 39.1% 41.7% 50.8% 58.0%Four years later 39.7% 36.1% 38.7% 41.2% 51.0%Five years later 39.5% 36.6% 38.1% 41.2%Six years later 39.8% 35.8% 38.3%Seven years later 38.5% 35.3%Eight years later 38.1%

Net ultimate major eventsInitial estimate1 20 116 334 274 283 771One year later 20 117 386 286 279Two years later 19 118 397 288Three years later 19 117 401 284Four years later 20 121 393Five years later 28 120 412Six years later 25 120 409Seven years later 19 120Eight years later 17

Net ultimate including major eventsInitial estimate1 5,943 1,565 424 660 922 632 1,372 1,815 1,814 1,964 2,537One year later 5,915 1,583 408 597 918 591 1,429 1,796 1,774 1,930Two years later 5,823 1,594 380 577 887 577 1,406 1,790 1,763Three years later 5,829 1,635 380 549 869 562 1,393 1,761Four years later 5,741 1,650 369 542 858 556 1,398Five years later 5,732 1,661 367 547 869 556Six years later 1,670 370 537 869Seven years later 1,656 358 532Eight years later 1,652 354

Net ultimate loss ratio including major eventsInitial estimate1 45.6% 56.6% 76.9% 46.9% 50.1% 71.3% 62.2% 61.3% 70.2%One year later 43.9% 51.2% 76.6% 43.8% 52.2% 70.6% 60.9% 60.3%Two years later 40.9% 49.4% 73.9% 42.8% 51.3% 70.3% 60.5%Three years later 40.9% 47.0% 72.5% 41.7% 50.8% 69.2%Four years later 39.7% 46.5% 71.5% 41.2% 51.0%Five years later 39.5% 46.9% 72.5% 41.2%Six years later 39.8% 46.0% 72.5%Seven years later 38.5% 45.6%Eight years later 38.1%

Cumulative net paid 5,277 1,573 319 494 808 484 1,115 1,321 911 859 727 13,887Estimated net ultimate claims 5,732 1,652 354 532 869 556 1,398 1,761 1,763 1,930 2,537 19,084Estimated net claim reserves 455 79 36 39 61 72 283 440 852 1,071 1,810 5,197Other net reserves2 83Booked reserves 5,279

1 Initial estimates for 2002 and prior shown as at 31 December 2003; initial estimates for Wellington accident periods 2006 and prior are shown as at the date of business combination

2 Other net reserves include unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and Life business.


Net paid losses US$m Table 4

Accident year

Wellington accident

periods 2006 and prior

2002 and prior 2003 2004 2005 2006 2007 2008 2009 2010 2011

Net premiums earned 929 1,167 1,199 1,348 2,740 2,545 2,914 3,203 3,612

Net paid excluding major eventsEnd of accident year1 3,790 1,089 95 127 119 156 352 312 361 408 447One year later 4,144 1,215 171 222 225 267 586 677 704 704Two years later 4,591 1,307 227 280 288 356 877 943 911Three years later 4,978 1,361 256 311 344 416 1,025 1,048Four years later 5,159 1,423 281 337 373 454 1,115Five years later 5,277 1,458 304 354 390 484Six years later 1,505 300 366 406Seven years later 1,531 311 373Eight years later 1,556 319

Net paid loss ratio excluding major eventsEnd of accident year1 10.2% 10.9% 10.0% 11.5% 12.9% 12.3% 12.4% 12.7% 12.4%One year later 18.4% 19.0% 18.8% 19.8% 21.4% 26.6% 24.2% 22.0%Two years later 24.5% 24.0% 24.0% 26.4% 32.0% 37.1% 31.2%Three years later 27.5% 26.7% 28.7% 30.8% 37.4% 41.2%Four years later 30.2% 28.8% 31.1% 33.7% 40.7%Five years later 32.7% 30.3% 32.5% 35.9%Six years later 32.3% 31.3% 33.8%Seven years later 33.4% 32.0%Eight years later 34.3%

Net paid major eventsEnd of accident year1 8 72 94 101 79 279One year later 13 113 248 193 154Two years later 15 116 347 251Three years later 19 117 378 273Four years later 19 119 393Five years later 21 120 399Six years later 21 120 402Seven years later 19 120Eight years later 17

Net paid including major eventsEnd of accident year1 3,790 1,097 95 199 213 156 352 413 361 487 727One year later 4,144 1,228 171 335 473 267 586 869 704 859Two years later 4,591 1,322 227 396 635 356 877 1,194 911Three years later 4,978 1,380 256 429 722 416 1,025 1,321Four years later 5,159 1,442 281 455 767 454 1,115Five years later 5,277 1,479 304 473 789 484Six years later 1,527 300 486 808Seven years later 1,549 311 494Eight years later 1,573 319

Net paid loss ratio including major eventsEnd of accident year1 10.2% 17.0% 17.8% 11.5% 12.9% 16.2% 12.4% 15.2% 20.1%One year later 18.4% 28.7% 39.5% 19.8% 21.4% 34.2% 24.2% 26.8%Two years later 24.5% 33.9% 52.9% 26.4% 32.0% 46.9% 31.2%Three years later 27.5% 36.7% 60.2% 30.8% 37.4% 51.9%Four years later 30.2% 39.0% 64.0% 33.7% 40.7%Five years later 32.7% 40.6% 65.8% 35.9%Six years later 32.3% 41.6% 67.4%Seven years later 33.4% 42.3%Eight years later 34.3%

1 End of accident year for 2002 and prior shown as at 31 December 2003; end of accident year for Wellington accident periods 2006 and prior are shown as at the date of business combination

Financial Review

70 Financial Statements Catlin Group Limited Annual Report and Accounts 2011

Report of the Independent AuditorsTo the Board of Directors and Stockholders of Catlin Group Limited

In our opinion, the accompanying Consolidated Balance Sheets and the related Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders’ Equity, Consolidated Statements of Cash Flows and Notes to the Consolidated Financial Statements present fairly, in all material respects, the !nancial position of Catlin Group Limited and its subsidiaries at 31 December 2011 and 31 December 2010, and the results of their operations and their cash #ows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These !nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these !nancial statements based on our audits. We conducted our audits of these statements in accordance with auditing

standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the !nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the !nancial statements, assessing the accounting principles used and signi!cant estimates made by management, and evaluating the overall !nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopersBermuda8 February 2012

71Financial StatementsCatlin Group Limited Annual Report and Accounts 2011

Consolidated Balance SheetsAs at 31 December 2011 and 2010 (US dollars in millions)

2011 2010

AssetsInvestments Fixed maturities, at fair value $6,029 $4,577 Short-term investments, at fair value 115 594 Other invested assets, at fair value 181 200

Total investments 6,325 5,371

Cash and cash equivalents 2,063 2,650Accrued investment income 39 33Premiums and other receivables 1,679 1,322Reinsurance recoverable on unpaid losses (net of bad debts) 1,188 1,039Reinsurance recoverable on paid losses 29 190Reinsurers’ share of unearned premiums 286 276Deferred policy acquisition costs 398 354Intangible assets and goodwill 717 716Unsettled trades receivable 55 –Other assets 180 131

Total assets $12,959 $12,082

Liabilities and Stockholders’ EquityLiabilities:Reserves for losses and loss expenses $6,467 $5,549Unearned premiums 2,119 1,886Reinsurance payable 415 559Accounts payable and other liabilities 301 273Subordinated debt 91 93Unsettled trades payable 66 37Deferred tax liability (net) 202 237

Total liabilities $9,661 $8,634

Stockholders’ equityCommon stock $4 $4Preferred stock 590 590Additional paid-in capital 1,959 1,955Treasury stock (105) (105)Accumulated other comprehensive loss (226) (184)Retained earnings 1,076 1,188

Total stockholders’ equity $3,298 $3,448

Total liabilities and stockholders’ equity $12,959 $12,082

The accompanying notes are an integral part of the consolidated !nancial statements.

Approved by the Board of Directors on 8 February 2012.

Stephen Catlin Benjamin MeuliDirector Director

Financial Statem

ents


Consolidated Statements of OperationsFor the years ended 31 December 2011 and 2010 (US dollars in millions, except per share amounts)

2011 2010

RevenuesGross premiums written $4,513 $4,069Reinsurance premiums ceded (678) (751)

Net premiums written 3,835 3,318Change in net unearned premiums (223) (99)

Net premiums earned 3,612 3,219

Net investment return 248 205Change in fair value of catastrophe swaps – (15)Net gains on foreign currency 9 3Other income 4 2

Total revenues 3,873 3,414

ExpensesLosses and loss expenses 2,529 1,852Policy acquisition costs 759 684Administrative and other expenses 504 457Financing costs 10 15

Total expenses 3,802 3,008

Net income before income tax 71 406Income tax bene!t/(expense) 11 (25)

Net income 82 381Preferred stock dividend (44) (44)

Net income to common stockholders $38 $337

Earnings per common shareBasic $0.11 $0.98Diluted $0.11 $0.93



Consolidated Statements of Changes in Stockholders’ EquityFor the years ended 31 December 2011 and 2010 (US dollars in millions)

Common stock

Preferred stock

Additional paid-in capital

Treasury stock

Accumulated other

comprehensive loss

Retained earnings

Total stockholders’

equity

Balance 1 January 2010 $4 $590 $1,938 $(62) $(189) $997 $3,278Comprehensive income:Net income to common stockholders – – – – – 337 337Other comprehensive income – – – – 5 – 5

Total comprehensive income – – – – 5 337 342

Stock compensation expense – – 23 – – – 23Dividends – – – – – (138) (138)Deferred compensation obligation – – 8 – – (8) –Treasury stock purchased – – – (57) – – (57)Distribution of treasury stock held

in Employee Bene!t Trust – – (14) 14 – – –

Balance 31 December 2010 $4 $590 $1,955 $(105) $(184) $1,188 $3,448

Comprehensive income:Net income to common stockholders – – – – – 38 38Other comprehensive loss – – – – (42) – (42)

Total comprehensive (loss)/income – – – – (42) 38 (4)

Stock compensation expense – – 10 – – – 10Stock options exercised – – 1 – – – 1Dividends – – – – – (150) (150)Treasury stock purchased – – – (7) – – (7)Distribution of treasury stock held

in Employee Bene!t Trust – – (7) 7 – – –

Balance 31 December 2011 $4 $590 $1,959 $(105) $(226) $1,076 $3,298


Financial Statem

ents


Consolidated Statements of Cash FlowsFor the years ended 31 December 2011 and 2010 (US dollars in millions)

2011 2010

Cash flows provided by operating activitiesNet income $82 $381Adjustments to reconcile net income to net cash provided by operations:Amortisation and depreciation 18 16Amortisation of net discounts of !xed maturities 46 26Net gains on investments (100) (65)Changes in operating assets and liabilities: Reserves for losses and loss expenses 924 224 Unearned premiums 240 155 Premiums and other receivables (362) (206) Deferred policy acquisition costs (46) (65) Reinsurance recoverable on unpaid losses (148) 107 Reinsurance recoverable on paid losses 163 72 Reinsurers’ share of unearned premiums (11) (56) Reinsurance payable (144) (83) Accounts payable and other liabilities 55 10 Deferred taxes (36) (9) Other (88) 102

Net cash #ows provided by operating activities 593 609

Cash flows used in investing activitiesPurchases of !xed maturities (7,360) (2,939)Proceeds from sales of !xed maturities 5,743 2,051Proceeds from maturities of !xed maturities 201 184Net purchases, sales and maturities of short-term investments 475 195Purchases of other invested assets (74) (44)Proceeds from sales and redemptions of other invested assets 92 392Net purchases and sales of property and equipment (60) (32)Purchases of intangible assets (3) –

Net cash #ows used in investing activities (986) (193)

Cash flows used in financing activitiesDividends paid on common stock (150) (138)Dividends paid on preferred stock (44) (44)Purchase of treasury stock (7) (57)

Net cash #ows used in !nancing activities (201) (239)

Net (decrease)/increase in cash and cash equivalents (594) 177

Effect of exchange rate changes 7 (27)Cash and cash equivalents – beginning of year 2,650 2,500

Cash and cash equivalents – end of year $2,063 $2,650

Supplemental cash flow informationTaxes paid/(received) $26 $(19)Interest paid $4 $3

Cash and cash equivalents comprise the following:Cash at bank and in hand $1,311 $2,215Cash equivalents $752 $435



Notes to the Consolidated Financial Statements For the years ended 31 December 2011 and 2010

1 Nature of operationsCatlin 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 Group consists of four reporting segments as described in Note 3.

The Group underwrites a broad range of products, including property, casualty, energy, marine and aerospace insurance and property, catastrophe and per-risk excess, non-proportional treaty, aviation, marine, casualty and motor reinsurance. Risks are insured worldwide, although risks originating in the United States predominate. The Group currently operates in more than 50 of!ces in 21 countries.

2 Significant accounting policiesBasis of presentationThe accompanying consolidated !nancial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘US GAAP’). The preparation of !nancial statements in conformity with US GAAP requires management to make estimates when recording transactions resulting from business operations based on information currently available. The most signi!cant items on the Group’s balance sheet that involve accounting estimates and actuarial determinations are reserves for losses and loss expenses, reinsurance recoverables, valuation of investments, intangible assets and goodwill. The accounting estimates are sensitive to market conditions, investment yields and other factors. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and re#ected in operating results. Although some variability is inherent in these estimates and actual results may differ from the estimates used in preparing the consolidated !nancial statements, management believes the amounts recorded are reasonable.

Principles of consolidationThe consolidated !nancial statements include the accounts of the Company and all of its wholly owned subsidiaries. All signi!cant inter-company transactions and balances are eliminated on consolidation.

Reporting currencyThe !nancial information is reported in United States dollars (‘US dollars’ or ‘$’).

Fixed maturities and short-term investmentsThe Group has elected to apply the fair value option to its !xed maturities and short-term investments. The Group’s !xed maturities and short-term investments are carried at fair value. The fair value is 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 underwriter bid indications. Short-term investments are composed of instruments with original maturities of more than 90 days and less than one year from the date of 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 !xed maturities and short-term investments are included in net investment return in the Consolidated Statements of Operations.

Other invested assetsThe Group’s other invested assets comprise investments in funds, equity securities and loan instruments. The Group’s other invested assets are carried at fair value. All gains or losses on other invested assets are included within net investment return in the Consolidated Statements of Operations.

Financial Statem

ents


2 Significant accounting policies continuedDerivativesThe Group recognises derivative !nancial 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 Statements of Operations. None of the derivatives used are designated as accounting hedges.

The fair values of the catastrophe swap agreements described in Note 8 are determined by management using internal models based on the valuation of the underlying notes issued by the counterparty. The determination of the fair values takes into account changes in the market for catastrophic reinsurance contracts with similar economic characteristics and the potential for recoveries from events preceding the valuation date.

The fair values of equity contracts, interest rate contracts and credit default contracts described in Note 8 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 !xed maturity investments. Gains and losses resulting from changes in fair value are included in net investment return in the Consolidated Statements of Operations.

The fair values of foreign exchange derivatives described in Note 8 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 Statements of Operations.

Cash and cash equivalentsCash equivalents are carried at cost, which approximates fair value, and include all investments with original maturities of 90 days or less.

Securities lendingThe Group participates in securities lending arrangements whereby speci!c securities are loaned to other institutions, primarily banks and brokerage !rms, 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 sheet. 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 Statements of Operations.

PremiumsPremiums 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 receivable are recognised and fully earned as they fall due.

Policy acquisition costsPolicy acquisition costs are those costs, consisting primarily of commissions and premium taxes that 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 de!ciency is recognised immediately by a charge to net income. If the premium de!ciency is greater than unamortised DPAC, a liability will be accrued for the excess de!ciency.

Notes to the Consolidated Financial Statements continuedFor the years ended 31 December 2011 and 2010


Reserves for losses and loss expensesA 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 insuf!cient); 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 principals. 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 in#ation, 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 re#ected in net income in the current year in the Consolidated Statements of Operations.

ReinsuranceIn the ordinary course of business, the Group’s subsidiaries cede premiums to other insurance companies. These arrangements allow for greater diversi!cation 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 and fully expensed as they fall due.

Reinsurance recoverables include the balances due from reinsurance companies for paid and unpaid 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 !nancial condition of the reinsurers and an assessment of other available information.

Intangible assets and goodwillThe Group’s intangible assets relate to syndicate capacity, distribution channels and US insurance licences (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 inde!nite life and as such are subject to annual impairment testing. Surplus lines authorisations and distribution channels are considered to have a !nite life and are amortised over their estimated useful lives of !ve years.

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 Statements of Operations.

Goodwill represents the excess of purchase price over the net fair value of identi!able assets acquired and liabilities assumed in a business combination. Goodwill is deemed to have an inde!nite life and is not amortised, but rather tested at least annually for impairment. Impairment losses are recognised in net income in the Consolidated Statements of Operations.

The impairment tests involve an assessment of the fair values of reporting units and intangible assets. 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.

Financial Statem

ents


2 Significant accounting policies continuedOther assetsOther 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 translation and transactionsForeign currency translationThe reporting currency of the Group is US dollars. The !nancial 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 #ows. 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 Statements of Operations are translated at average rates of exchange for the period. The resulting translation differences are recorded as a separate component of accumulated other comprehensive income/(loss) within stockholders’ equity.

Foreign currency transactionsMonetary assets and liabilities denominated in currencies other than the functional currency are revalued at period-end rates of exchange, with the resulting gains and losses included in net income.

Income taxesIncome 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 !nancial statements and the tax basis of the Group’s assets and liabilities. Such temporary differences are primarily due to the recognition of untaxed pro!ts 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 net 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 bene!ts related to deferred tax assets will not be realised.

Stock compensationThe fair value of awards under stock-based compensation arrangements is calculated on the grant date based on the share price and the exchange rate in effect on that date and is recognised on a straight-line basis over the vesting period. The calculation is updated on a regular basis to re#ect revised vesting expectations and actual experience.

WarrantsWarrant contracts are initially recorded in additional paid-in capital at cost, and continue to be classi!ed as equity so long as they meet certain conditions. Subsequent changes in fair value are not recognised in the Consolidated Statements of Operations as long as the warrant contracts continue to be classi!ed as equity.

PensionsThe Group operates de!ned contribution pension schemes for eligible employees, the costs of which are expensed as incurred.

The Group also sponsors a de!ned bene!t pension scheme which was closed to new members in 1993. Any surplus or de!cit on the scheme is carried as an asset or liability on the balance sheet.



New accounting pronouncementsIn October 2010 the Financial Accounting Standards Board (‘FASB’) issued new accounting guidance specifying how costs associated with acquiring or renewing insurance contracts should be identi!ed and capitalised. This guidance is effective for periods beginning after 15 December 2011. Earlier adoption is permitted. Retrospective application is also permitted but not required. Catlin intends to adopt this updated accounting guidance from 1 January 2012 and does not expect the guidance to have a signi!cant effect on the Group’s !nancial position or results of operations.

In June 2011 the FASB issued an accounting standard update requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The update is effective for years (including interim periods) beginning after 15 December 2011. The adoption of this accounting standard update will not have a signi!cant impact on the Company’s !nancial position or result of operations.

In September 2011 the FASB issued an accounting standard update on testing goodwill for impairment, effective for years beginning after 15 December 2011. By providing the option to perform a ‘qualitative’ assessment to determine whether further impairment testing is necessary, the update aims to reduce the cost and complexity of performing the annual goodwill impairment test. The Company has adopted this accounting standard update, effective for the year ended 31 December 2011. The adoption of the new accounting standard update did not have a signi!cant impact on the Company’s !nancial position or result of operations.

In 2011 the Group adopted amendments to accounting guidance for fair value disclosures, which did not have a material impact on the Group’s !nancial position or results of operations.

3 Segmental informationThe 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/UK, which comprises direct insurance and reinsurance business originating in the United Kingdom;Bermuda, which primarily underwrites reinsurance business;US, which underwrites direct insurance and reinsurance business originating in the United States; andInternational, which comprises the Group’s Asia-Paci!c, Europe and Canada underwriting hubs which provide a full complement of insurance and reinsurance services for their markets.

At 31 December 2011 there were four signi!cant intra-Group reinsurance contracts in place: a 53.25 per cent Quota Share, which cedes Catlin Syndicate risk to Catlin Re Switzerland; a 75 per cent quota share contract which cedes Catlin UK risk to Catlin Re Switzerland; a Whole Account Stop Loss contract which cedes 6.75 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 also a 75 per cent quota share contract which cedes Catlin US risk to Catlin Re Switzerland. Further quota share contracts were in place ceding risk on 2010 and prior underwriting years to 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 2011 is as follows:

US dollars in millions London/UK Bermuda US International Total

Gross premiums written $2,342 $549 $852 $770 $4,513

Net premiums earned 1,891 471 636 614 3,612Losses and loss expenses (1,231) (435) (403) (460) (2,529)Policy acquisition costs (419) (102) (118) (120) (759)

Net underwriting contribution $241 $(66) $115 $34 $324

Financial Statem

ents


3 Segmental information continuedNet underwriting contribution by underwriting hub for the year ended 31 December 2010 is as follows:

US dollars in millions London/UK Bermuda US International Total

Gross premiums written $2,323 $502 $707 $537 $4,069

Net premiums earned 1,827 427 538 427 3,219Losses and loss expenses (1,052) (177) (349) (274) (1,852)Policy acquisition costs (409) (99) (94) (82) (684)

Net underwriting contribution $366 $151 $95 $71 $683

The components of net underwriting contribution shown above are reported on the face of the Consolidated Statements of Operations. 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.

4 InvestmentsFixed maturitiesThe fair values of !xed maturities at 31 December 2011 and 2010 are as follows:

US dollars in millions2011

Fair value2010

Fair value

US government and agencies $1,702 $1,071Non-US governments 1,326 1,002Corporate securities 1,529 1,566Asset-backed securities 602 274Mortgage-backed securities 860 662Interest rate derivative contracts 8 2Credit default derivative contracts 2 –

Total !xed maturities $6,029 $4,577

$713 million (2010: $477 million) of the total mortgage-backed securities at 31 December 2011 is represented by investments in Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Bank and Federal Home Loan Mortgage Corporation bonds.

The Group has no direct exposure to government bonds issued by Portugal, Italy, Ireland, Greece and Spain.

The composition of the fair values of !xed maturities by ratings assigned by rating agencies is as follows:

2011 2010

US dollars in millions Fair value % Fair value %

US government and agencies $1,702 28 $1,071 23Non-US governments 1,326 22 1,002 22AAA 908 16 1,329 29AA 1,465 24 550 12A 483 8 503 11BBB and other 135 2 120 3Interest rate derivative contracts 8 – 2 –Credit default derivative contracts 2 – – –

Total !xed maturities $6,029 100 $4,577 100

Fixed maturities at 31 December 2011, 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.



Fair value US dollars in millions2011

Fair value2010

Fair value

Due in one year or less $540 $564Due after one year through !ve years 3,158 2,559Due after !ve years through ten years 771 438Due after ten years 88 78

4,557 3,639Asset-backed securities 602 274Mortgage-backed securities 860 662Interest rate derivative contracts 8 2Credit default derivative contracts 2 –

Total $6,029 $4,577

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 31 December 2011 and 2010.

Other invested assetsOther invested assets by category at 31 December 2011 and 2010 are as follows:

US dollars in millions 2011 2010

Hedge funds $109 $200Equity funds 23 –

Total investments in funds 132 200Equity securities 38 –Loan instruments 11 –

Total other invested assets $181 $200

Hedge funds are a portfolio comprising ten individual hedge funds. The Group has issued redemption notices in respect of nine of the hedge funds and received the majority of the proceeds. The balance will be paid on the completion of !nal fund audit or the disposal of remaining investments. The redemption terms for the remaining hedge fund are three days’ notice with full settlement three days’ post submission of notice.

Equity funds are a portfolio comprising three individual private equity funds entered into in 2011. The equity funds have initial investment periods of up to !ve years.

Equity securities comprise $24 million of exchange traded funds and $14 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 $58 million as at 31 December 2011 (2010: $25 million).

Net investment returnThe components of net investment return for the years ended 31 December 2011 and 2010 are as follows:


Interest income $156 $147Net gains on !xed maturities and short-term investments 102 46Net (losses)/gains on other invested assets (2) 19

Total investment return 256 212Investment expenses (8) (7)

Net investment return $248 $205

The Group has elected to apply the fair value option to its !xed maturities and short-term investments. In 2011 net gains of $102 million (2010: $46 million) were included in the Consolidated Statements of Operations in relation to changes in the fair value of these assets.

Gains in 2011 on !xed maturities and short-term investments still held at 31 December 2011 were $38 million (2010: $33 million). Losses in 2011 on other invested assets still held at 31 December 2011 were $3 million (2010: $15 million gain).

Financial Statem

ents


4 Investments continuedRestricted assetsThe 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 18. Finally, the Group also utilises trust funds set up for the bene!t of certain ceding companies as alternative to LOCs.

The total value of these restricted assets by category at 31 December 2011 and 2010 is as follows:


Fixed maturities $2,957 $2,275Short-term investments 35 503Cash and cash equivalents 636 656

Total restricted assets $3,628 $3,434

Securities lendingThe Group participates in a securities lending programme under which certain of its !xed maturity investments are loaned to third parties through a lending agent. Collateral in the form of cash, government securities and letters of credit is required at a minimum rate of 102 per cent of the market value of the loaned securities and is monitored and maintained by the lending agent. The Group had $15 million (2010: $12 million) of securities on loan at 31 December 2011.

5 Fair value measurementThe FASB accounting guidance on fair value measurements and disclosures de!nes 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 signi!cant degree of judgment.

Assets utilising Level 1 inputs comprise US government securities and quoted exchange traded funds.

Level 2 – Valuations based on quoted prices in markets that are not active or for which signi!cant 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 identi!ed as Level 3 items; over-the-counter (‘OTC’) derivatives (e.g. foreign exchange contracts and interest rate contracts); !xed-term cash deposits classi!ed 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 signi!cant to the overall fair value measurement. The unobservable inputs re#ect our own assessment of assumptions that market participants might use.

Assets utilising Level 3 inputs include: investments in funds with signi!cant redemption restrictions; unquoted private equity and debt not qualifying as Level 2; collateralised debt obligations (‘CDO’); sub-prime securities, Alt-A securities and securities rated CCC and below, where the unobservable inputs re#ect 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 !nancial instrument to !nancial instrument and is affected by a wide variety of factors, including, for example, the type of !nancial instrument, whether the !nancial 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 signi!cantly 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 reclassi!ed between levels.

Assets measured at fair value on a recurring basisThe table below shows the values at 31 December 2011 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 31 December

2011Level 1 inputs

Level 2 inputs

Level 3 inputs

AssetsUS government and agencies $1,702 $1,218 $484 $–Non-US governments 1,326 – 1,326 –Corporate securities 1,529 – 1,529 –RMBS 795 – 751 44CMBS 65 – 62 3ABS 602 – 602 –Interest rate derivative contracts 8 – 8 –Credit default derivative contracts 2 – 2 –

Total !xed maturities 6,029 1,218 4,764 47Short-term investments 115 – 115 –Other invested assets 181 24 37 120

Total assets at fair value $6,325 $1,242 $4,916 $167

In 2011, there were no signi!cant transfers between Level 1 and Level 2 of the fair value hierarchy.

The table below shows the values at 31 December 2010 of assets and liabilities measured at fair value on a recurring basis, analysed by the level of inputs used.


Balance as at 31 December

2010Level 1 inputs

Level 2 inputs

Level 3 inputs

AssetsUS government and agencies $1,071 $745 $326 $–Non-US governments 1,002 – 1,002 –Corporate securities 1,566 – 1,566 –RMBS 503 – 501 2CMBS 159 – 159 –ABS 271 – 268 3CDO 3 – – 3Interest rate derivative contracts 2 – 2 –

Total !xed maturities 4,577 745 3,824 8Short-term investments 594 501 93 –Other invested assets 200 – 40 160

Total assets at fair value $5,371 $1,246 $3,957 $168

In 2010 the Group reclassi!ed US Treasuries to Level 1 securities as it determined that the level of trading activity for all US Treasuries is high and that quoted prices are readily and regularly available for these securities.

Financial Statem

ents


5 Fair value measurement continuedThe changes in the year ended 31 December 2011 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

US dollars in millions Total RMBS ABS CDO CMBS

Other invested

assets

Balance, 1 January 2011 $168 $2 $3 $3 $– $160Total net gains/(losses) included in income 2 (2) – 5 – (1)Acquisitions 92 47 – – 2 43Disposals (105) (11) (3) (8) – (83)Maturities – – – – – –Transfers into Level 3 9 8 – – 1 –Transfer out of Level 3 – – – – – –Foreign exchange 1 – – – – 1

Balance, 31 December 2011 $167 $44 $– $– $3 $120

Amount of losses relating to balances still held at year end $(2) $(1) $– $– $– $(1)

Assets transferred into Level 3 were securities classi!ed as sub-prime at 31 December 2011 but not at 31 December 2010.

The changes in the year ended 31 December 2010 in balances measured at fair value on a recurring basis using Level 3 inputs were as follows:

US dollars in millions Total RMBS ABS CDO

Other invested

assetsCatastrophe

swaps

Balance, 1 January 2010 $432 $66 $4 $4 $357 $1Total net gains/(losses) included in income 27 6 1 1 20 (1)Net (disposals)/purchases (290) (70) (2) (2) (216) –Foreign exchange (1) – – – (1) –

Balance, 31 December 2010 $168 $2 $3 $3 $160 $–

Amount of gains relating to balances still held at year end $17 $2 $– $– $15 $–

Fair value of financial instrumentsThe following methods and assumptions are used by the Group in estimating the fair value of its !nancial instruments:

Fixed maturities and short-term investments: Fair values of !xed 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.

Other invested assets: The fair value of investments in funds is based on either the net asset value provided by the funds’ administrators, or where available, the quoted price of the funds. The fair values of holdings in equity and loan instruments are based on the 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 provided by administrators and recent transactions, if any.

Derivatives: The fair values of interest rate, foreign exchange and credit default derivative contracts are based on prices provided by independent pricing services.

Subordinated debt: Subordinated debt is carried at amortised cost. At 31 December 2011, the fair value of the subordinated debt was $58 million which compared to a carrying value of $91 million. The fair value of the subordinated debt is estimated by comparing Catlin Bermuda’s preferred stock and other peer group instruments to determine market required yields. Market required yields were used to estimate market value.

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 !nancial instruments.



6 Reserves for losses and loss expensesThe 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 re#ected 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 31 December 2011 and 2010.

The reconciliation of unpaid losses and loss expenses for the years ended 31 December 2011 and 2010 is as follows:


Gross unpaid losses and loss expenses, beginning of year $5,549 $5,392Reinsurance recoverable on unpaid loss and loss expenses (1,039) (1,172)

Net unpaid losses and loss expenses, beginning of year 4,510 4,220

Net incurred losses and loss expenses for claims related to: Current year 2,632 1,996 Prior years (103) (144)

Total net incurred losses and loss expenses 2,529 1,852

Net paid losses and loss expenses for claims related to: Current year (724) (461) Prior years (1,000) (1,050)

Total net paid losses and loss expenses (1,724) (1,511)

Foreign exchange and other (36) (51)

Net unpaid losses and loss expenses, end of year 5,279 4,510Reinsurance recoverable on unpaid losses 1,188 1,039

Gross unpaid losses and loss expenses, end of year $6,467 $5,549

As a result of the changes in estimates of insured events in prior years, the 2011 reserves for losses and loss expenses net of reinsurance recoveries decreased by $103 million (2010: $144 million). The decrease in reserves relating to prior years was due to reductions in expected ultimate loss costs and reductions in uncertainty surrounding the quanti!cation of the net cost claim events.

7 ReinsuranceThe 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:

2011 2010

US dollars in millionsPremiums

writtenPremiums

earnedLosses

incurredPremiums

writtenPremiums

earnedLosses

incurred

Direct $2,834 $2,747 $1,545 $2,712 $2,653 $1,538Assumed 1,679 1,528 1,361 1,357 1,261 580Ceded (678) (663) (377) (751) (695) (266)

Net premiums $3,835 $3,612 $2,529 $3,318 $3,219 $1,852

The Group’s reinsurance recoverable on unpaid losses as at 31 December 2011 and 2010 is as follows:


Gross reinsurance recoverable $1,221 $1,087Provision for uncollectible balances (33) (48)

Net reinsurance recoverable on unpaid losses $1,188 $1,039

Financial Statem

ents


7 Reinsurance continuedThe Group evaluates the !nancial condition of its reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. All current reinsurers have a !nancial strength rating of at least ‘A’ from Standard and Poor’s or ‘A-’ from A.M. Best at the time of placement, or provide appropriate collateral. However, certain reinsurers from prior years have experienced reduced ratings which have led to the need for the provision. At 31 December 2011 there were two reinsurers which accounted for 5 per cent or more of the total reinsurance recoverable balance.

% of reinsurance recoverable

A.M. Best rating

Munich Re 23% A+Hannover Ruck-AG 7% A

8 Derivative financial instrumentsThe 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.

Interest rate riskThe investment portfolio is predominantly invested in cash and !xed 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 cash and !xed income securities.

Gains and losses on interest rate derivative contracts are included in net investment return together with related gains on !xed maturities in the Consolidated Statements of Operations. Interest rate derivative contracts’ fair value is included in !xed maturities on the Consolidated Balance Sheets.

Foreign exchange riskDuring the year, 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 Statements of Operations. The carrying value of foreign exchange contracts at 31 December 2011 and 2010 was nil.

Credit riskPart 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 #uctuations arising from the market’s evaluation of this risk. Credit default option 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 on !xed maturities in the Consolidated Statements of Operations. Credit default options’ fair value is included in !xed maturities on the Consolidated Balance Sheets.

Equity riskA portion of the investment portfolio is invested in hedge funds and funds of funds. During 2010, equity market put option contracts were held to manage the market risk associated with holding these investments in funds.

Equity market put option contracts provide the option purchaser with the right but not the obligation to sell a !nancial instrument at a predetermined exercise price during a de!ned period. Options contracts are marked to market on a daily basis.

Gains and losses on equity market options are included in net investment return together with related gains on investments in funds in the Consolidated Statements of Operations. Equity market put option contracts’ fair value is included in other invested assets on the Consolidated Balance Sheets. The Group held and closed out equity market put options in 2010, with none held at 31 December 2011 and 2010.

Catastrophe swap agreementsDuring 2010, Catlin Bermuda held a catastrophe swap which provided coverage in the event of one or more natural catastrophes. Catlin Bermuda’s counterparty in the catastrophe swap was a special purpose vehicle, Newton Re. The catastrophe swap expired in 2010 without being triggered. No catastrophe swaps were held at 31 December 2011 and 2010.



Impact of derivativesThe fair values of derivatives at 31 December 2011 and 2010 are as follows:

2011 2010

US dollars in millions Assets Liabilities Assets Liabilities

Interest rate derivative contracts $18 $10 $2 $–Credit default option contracts 2 – – –

Total derivatives $20 $10 $2 $–

The notional values of exchange traded and over-the-counter open derivatives at 31 December 2011 and 2010 are as follows:

Notional value


Interest rate options $3,600 $850Other interest rate derivative contracts 500 –Foreign exchange contracts 14 –Credit default option contracts 650 –

The net gains/(losses) on derivatives at 31 December 2011 and 2010 are as follows:


Equity market options contracts $– $(4)Interest rate derivative contracts 2 (6)Foreign exchange contracts 1 (8)Credit default option contracts (1) –Catastrophe swaps – (15)

Net gains/(losses) on derivatives $2 $(33)

The derivatives contracts held by the Group at 31 December 2011 contain no credit risk-related contingent features.

9 Subordinated debtThe Group’s outstanding subordinated debt as at 31 December 2011 and 2010 consisted of the following:


Variable rate, face amount €7, due 15 March 2035 $9 $9Variable rate, face amount $27, due 15 March 2036 27 27Variable rate, face amount $31, due 15 September 2036 31 32Variable rate, face amount $10, due 15 September 2036 10 10Variable rate, face amount €11, due 15 September 2036 14 15

Total subordinated debt $91 $93

On 12 May 2006 Catlin Underwriting (formerly known as Wellington Underwriting plc) issued $27 million and €7 million of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all senior creditors, as de!ned in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 317 basis points for the Dollar note and 295 basis points for the Euro note. Interest is payable quarterly in arrears. The notes were redeemable at the discretion of the issuer beginning on 15 March 2011 with respect to the Dollar notes and 22 May 2011 with respect to the Euro notes.

On 20 July 2006 Catlin Underwriting issued $31 million, $10 million and €11 million of variable rate unsecured subordinated notes. The notes are subordinated to the claims of all senior creditors, as de!ned in the agreement. The notes pay interest based on the rate on three-month deposits in US dollars plus a margin of 310 basis points for the $31 million notes and 300 basis points for the other two notes. Interest is payable quarterly in arrears. The notes were each redeemable at the discretion of the issuer on 15 September 2011.

Financial Statem

ents


10 Intangible assets and goodwillThe Group’s intangible assets relate to the purchase of syndicate capacity, distribution channels and US insurance licences (as admitted and eligible surplus lines insurers). Goodwill represents the excess of purchase price over the net fair value of identi!able assets acquired and liabilities assumed in a business combination.

Net intangible assets and goodwill as at 31 December 2011 and 2010 consist of the following:

US dollars in millions GoodwillInde!nite life

intangiblesFinite life

intangibles Total

Net value at 1 January 2010 $77 $637 $4 $718

Movements during 2010: Foreign exchange revaluation (3) – – (3) Acquisitions 3 – – 3 Amortisation charge – – (2) (2)

Total movements during 2010 – – (2) (2)

Net value at 31 December 2010 77 637 2 716

Movements during 2011: Foreign exchange revaluation – – – – Acquisitions – 3 – 3 Amortisation charge – – (2) (2)

Total movements during 2011 – 3 (2) 1

Net value at 31 December 2011 $77 $640 $– $717

Goodwill, syndicate capacity and admitted licences are considered to have an inde!nite life and as such are tested annually for impairment as at 30 September. Neither goodwill nor intangibles were considered impaired in 2011 or 2010.

The acquisition of inde!nite life intangibles in 2011 relates to the purchase of admitted licences in the United States.

The syndicate capacity comprises underwriting capacity that the Group purchased through business combination, syndicate cessation and direct purchases.

Syndicate capacity is tested annually for impairment by comparing management’s estimate of its fair value to the amount at which it is carried in the Group’s Consolidated Balance Sheets.

The fair value of the Group’s syndicate capacity is assessed by reference to market activity where relevant and internally developed cash #ow models. In 2011 and 2010, management determined that the fair value of syndicate capacity exceeded its carrying value.

Distribution channels and surplus lines authorisations are considered to have a !nite life and are amortised over their estimated useful lives of !ve years. As at 31 December 2011 the gross carrying amount of !nite life intangibles was $10 million (2010: $10 million) and accumulated amortisation was $10 million (2010: $8 million). Amortisation of intangible assets in future years will be $nil.

11 TaxationBermudaUnder 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 KingdomThe Group also operates in the UK through its UK subsidiaries and the income of the UK companies is subject to UK corporation taxes.

Legislation was introduced in Finance Act 2011 to reduce the main rate of corporation tax in the UK from 28 per cent to 26 per cent with effect from 1 April 2011, and by a further 1 per cent reduction to 25 per cent with effect from 1 April 2012. The effect of this enacted reduction is re#ected in the deferred tax liability recorded on the Consolidated Balance Sheets as at 31 December 2011.



The UK government has also announced its intent to reduce the rate by a further 1 per cent per annum, falling to 23 per cent with effect from 1 April 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 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 StatesThe Group also operates in the United States through its subsidiaries and their income is subject to both US state and federal income taxes.

SwitzerlandThe Group expanded its underwriting operations in Switzerland during 2011 and the income of these subsidiaries is subject to Swiss federal and cantonal taxes.

Other international income taxesThe Group has a network of international operations and they also are 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 years ended 31 December 2011 and 2010 is as follows:


Current tax expense $6 $12Deferred tax expense 2 19

8 31

Rate change on deferred tax (19) (6)

(Bene!t)/expense for income taxes $(11) $25

The effective tax rate for the Group is negative 15.6 per cent (2010: 6.3 per cent). The rate change bene!t of $19 million is a result of a reduction in the UK corporation tax rate from 27 per cent to 25 per cent on the net deferred tax liability. A reconciliation of the difference between the expense for income taxes and the expected tax expense at the weighted average tax rate for the years ended 31 December 2011 and 2010 is provided below. The weighted average expected tax expense has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.


Expected tax expense at weighted average rate $10 $15Permanent differences: Disallowed expenses and losses not recognised 10 11 Prior year adjustments including changes in uncertain tax positions (12) 5 Rate change (19) (6)

(Bene!t)/expense for income taxes $(11) $25

Financial Statem

ents


11 Taxation continuedThe components of the Group’s net deferred tax liability as at 31 December 2011 and 2010 are as follows:


Deferred tax assets: Net operating loss carry forwards $267 $303 Foreign tax credits 42 43 Capital allowances 13 10 Other timing differences 25 5 Valuation allowance (25) (30)

Total deferred tax assets $322 $331

Deferred tax liabilities: Untaxed pro!ts (416) (459) Intangible assets arising on business combination (92) (94) Syndicate capacity (16) (15)

Total deferred tax liabilities $(524) $(568)

Net deferred tax liability $(202) $(237)

As at 31 December 2011 the Group has operating tax losses carried forward of $1,069 million (2010: $1,152 million) which are available to offset future taxable income. The tax losses primarily arise in UK subsidiaries and relate to accelerated tax deductions for member-level reinsurance premiums. These are taxed on a declarations basis and are therefore only timing items. There are no time restrictions on the use of these losses and they are expected to be fully utilised.

As at 31 December 2011 there are potential deferred tax assets of $25 million (2010: $30 million) in the US companies relating to future tax deductions, but a 100 per cent valuation allowance has been recognised in respect of these.

Uncertain tax positionsAs at 31 December 2011 the liability amount of uncertain tax bene!ts was $13 million (2010: $13 million). All unrecognised tax bene!ts would affect the effective tax rate if recognised.

A reconciliation of the beginning and ending amount of unrecognised tax bene!ts arising from uncertain tax positions is as follows:


Unrecognised tax bene!ts balance at 1 January $13 $4Gross decreases for tax positions of prior years – 9

Unrecognised tax bene!ts balance at 31 December $13 $13

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 !nancial statements. The Group did not pay or accrue any interest or penalties in 2011 or 2010 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 2008-2011United States 2008-2011



12 Stockholders’ equityThe following sets out the number and par value of shares authorised, issued and outstanding as at 31 December 2011 and 2010:

2011 2010

Common stock, par value $0.01Authorised 500,000,000 500,000,000

Issued 360,990,321 359,118,666Stock held by Employee Bene!t Trust (16,031,213) (16,467,609)

Outstanding 344,959,108 342,651,057

Preferred stock, par value $0.01Authorised, issued and outstanding 600,000 600,000

The following table outlines the changes in common stock issued during 2011 and 2010:

2011 2010

Balance, 1 January 359,118,666 358,895,225Exercise of stock options and warrants 1,871,655 223,441

Balance, 31 December 360,990,321 359,118,666

Preferred stockOn 18 January 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 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.

Treasury stockIn connection with the Performance Share Plan (‘PSP’), at each dividend date an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting) is paid into an Employee Bene!t Trust (‘EBT’). The EBT uses these funds to purchase Group common stock in the open market. This stock will ultimately be distributed to PSP holders to the extent that the PSP awards vest. The Group has also purchased shares that will be used to satisfy PSP and/or other employee share plan awards if and when they vest and become exercisable. During 2011, the Group, through the EBT, purchased 1,144,471 of the Group’s stock at an average of $6.31 (£3.83) per unit. The total amount paid for treasury stock of $7 million was deducted from stockholders’ equity. The cost of shares held by the EBT of $105 million is shown as a deduction to the stockholders’ equity.

WarrantsIn 2002 the Company issued 20,064,516 warrants to purchase common stock. Warrants may be exercised in whole or in part, at any time, until 4 July 2012 and are exercised at a price of $4.37. During 2009 warrants increased by 874,829 in relation to the Rights Issue pursuant to anti-dilution provisions. During 2011, 5,491,730 warrants to purchase common stock were exercised and settled net for 1,476,574 shares of common stock, leaving 1,420,985 warrants outstanding at 31 December 2011.

DividendsDividends on common stockOn 18 March 2011 the Group paid a !nal dividend on the common stock relating to 2010 !nancial year of 17.9 pence per share (28.8 cents per share) to stockholders of record at the close of business on 18 February 2011. The total dividend paid for the 2010 !nancial year was 26.5 pence per share (42.5 cents per share).

On 23 September 2011, the Group paid an interim dividend relating to the 2011 !nancial year of 9.0 pence per share (14.7 cents per share) to stockholders of record on 26 August 2011.

Dividends on preferred stockOn both 19 January and 19 July 2011, Catlin Bermuda paid a semi-annual dividend of $22 million to the stockholders of the non-cumulative perpetual preferred stock.

Financial Statem

ents


13 Employee stock compensation schemesThe Group has !ve employee schemes in place, of which the most signi!cant is the Performance Share Plan (‘PSP’), adopted in 2004. The Long-Term Incentive Plan (‘LTIP’) was adopted in 2002 and the last awards were made in 2004. In addition, the Group also has three Employee Share Plans in place. The expense related to the Employee Share Plans is considered to be insigni!cant. These !nancial 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 2011 was $10 million (2010: $23 million), included in administrative and other expenses. As described below, the valuation of the PSP is periodically revised to take into account changes in performance against vesting conditions.

Performance Share PlanIn February 2011 a total of 7,225,549 options with $nil exercise price and 2,677,820 non-vested shares (total of 9,903,369 securities) were awarded to Group employees under the PSP. In August 2011, a further 101,183 options with $nil exercise price and 275,244 non-vested shares (total of 376,427 securities) were awarded, resulting in a total of 10,279,796 securities granted to Group employees under the PSP in 2011. Up to half of the securities will vest in 2014 and up to half will vest in 2015, subject to certain performance 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 amongst participating employees of 2 per cent for grants made in 2011, 3 per cent for grants made in 2010, 5 per cent for grants made in 2009 and 5 per cent for grants made in 2008. This initial valuation 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 difference is charged or credited to the Consolidated Statements of Operations, with a corresponding adjustment to equity. The total number of shares in respect of which PSP securities were outstanding at 31 December 2011 was 27,776,130 (2010: 22,393,627), and the total amount of expense relating to PSP for the year ended 31 December 2011 was $10 million (2010: $23 million).

The table below shows the PSP securities as at 31 December 2011:

Outstanding Non-vested Vested

Weighted average

fair value

Beginning of year 22,393,627 22,079,927 313,700 $5.70Granted during year 10,279,796 10,279,796 – $5.99Vested during year (2,985,199) (4,032,630) 1,047,431 $6.06Forfeited during year (918,544) (918,544) – $6.17Exercised during year (993,550) – (993,550) $6.16

End of year 27,776,130 27,408,549 367,581 $6.18

Exercisable, end of year 367,581 – 367,581 $6.18

The total fair value of shares vested during the year was $6 million (2010: $11 million).

The weighted average remaining contractual life of the options is eight years. The maximum contractual term of the equity share options outstanding is nine years.

The total compensation to be expensed in future periods relating to unvested awards outstanding at the year end is $11 million. The weighted average period of recognition of these shares is 1.5 years.

In addition, at each dividend payment date up to 2011 an amount equal to the dividend that would be payable in respect of the shares to be issued under the PSP (assuming full vesting), was paid into the EBT. This amount, totalling $nil in 2011 (2010: $8 million), is taken directly to retained earnings and capitalised in stockholders’ equity within additional paid-in capital.

Long-Term Incentive PlanOptions over a total of 16,791,592 ordinary common shares were granted to eligible employees in 2004 and prior years. The LTIP options were fully exercisable and expensed by 31 December 2007. There was no compensation expense in relation to the LTIP for the years ended 31 December 2011 and 2010. All options will expire by 4 July 2012. As at 31 December 2011 there were 4,031,382 (2010: 4,568,169) options outstanding with an exercise price of $4.37 and 74,607 (2010: 78,097) options outstanding with an exercise price of £3.06.



14 Earnings per shareBasic earnings per share is 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) LTIP;(iii) Warrants; and(iv) Employee Share Plans.

Income to common stockholders is arrived at after deducting preferred share dividends of $44 million (2010: $44 million).

Reconciliations of the number of shares used in the calculations are set out below:

2011 2010

Weighted average number of shares 344,295,329 344,634,882Dilution effect of warrants 1,912,689 1,353,902Dilution effect of stock options and non-vested shares 11,547,550 16,856,689

Weighted average number of shares on a diluted basis 357,755,568 362,845,473

Earnings per common shareBasic $0.11 $0.98Diluted $0.11 $0.93

In 2011 and 2010 securities awarded under the PSP were included in the computation of diluted earnings per share to the extent that the performance conditions necessary for these securities to vest were met as at 31 December 2011 and 2010.

15 Other comprehensive income/(loss)The following table details the individual components of other comprehensive income/(loss) for 2011 and 2010:

2011US dollars in millions

Amount before tax

Tax benefit/(expense)

Amount after tax

Cumulative translation adjustments $(46) $4 $(42)De!ned bene!t pension plan – – –

Other comprehensive loss $(46) $4 $(42)

2010US dollars in millions

Amount before tax

Tax bene!t/(expense)

Amount after tax

Cumulative translation adjustments $15 $(11) $4De!ned bene!t pension plan 1 – 1

Other comprehensive income $16 $(11) $5

The following table details the components of accumulated other comprehensive loss as at 31 December:


Cumulative translation adjustments $(227) $(185)Funded status of de!ned bene!t pension plan adjustment 1 1

Accumulated other comprehensive loss $(226) $(184)

Financial Statem

ents


16 Pension commitmentsThe Group operates various pension schemes for employees in the different countries of operation.

In the UK the Group operates de!ned contribution schemes for certain Directors and employees, which are administered by third-party insurance companies. The pension cost for the UK scheme was $11 million for the year ended 31 December 2011 (2010: $8 million).

In Bermuda the Group operates a de!ned contribution scheme, under which the Group contributes a speci!ed percentage of each employee’s earnings. The pension cost for the Bermuda scheme was $1 million for the year ended 31 December 2011 (2010: $1 million).

In the US the Group has adopted a 401(k) Pro!t Sharing Plan quali!ed under the Internal Revenue Code and a Non-Quali!ed Deferred Compensation Plan under which the Group contributes a speci!ed percentage of each employee’s earnings. The pension cost for the US scheme was $5 million for the year ended 31 December 2011 (2010: $8 million).

In connection with the acquisition of Wellington in December 2006, the Group assumed liabilities associated with a de!ned bene!t 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 bene!t obligations at 31 December 2011 were $26 million (2010: $25 million) and fair value of plan assets was $28 million (2010: $27 million). Plan assets are substantially all invested in corporate bonds, valued using Level 2 inputs in the fair value hierarchy described in Note 5. The pension costs for the de!ned bene!t scheme were insigni!cant for the years ended 31 December 2011 and 2010.

Pension costs for pension schemes in other countries of operation are considered individually insigni!cant but in aggregate amount to $4 million (2010: $3 million).

17 Statutory financial dataThe statutory capital and surplus of each of the Group’s principal operating subsidiaries is in excess of regulatory requirements of $987 million (2010: $1,081 million). The Group also has suf!cient capital available to meet Funds at Lloyd’s requirements of $1,340 million (2010: $1,331 million).

The Group’s ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is limited by applicable laws and statutory requirements of the jurisdictions in which the Group operates.

The Group is also subject to restrictions on some of its assets to support its insurance and reinsurance operations, as described in Note 4.

18 Commitments and contingenciesLegal proceedingsThe Group is party to a number of legal proceedings arising in the ordinary course of the Group’s business which have not been !nally 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 !nancial condition of the Group.

Concentrations of credit riskAreas where signi!cant 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 diversi!cation. Speci!c 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 signi!cant concentrations of credit risk associated with its investments or its reinsurers. Note 7 describes concentrations of more than 5 per cent of the Group’s total reinsurance recoverable asset.



Letters of creditThe Group arranges letter of credit facilities to support its reinsurance business and for general corporate purposes.

As at 31 December 2011, the Group has access to the following letter of credit facilities:

A three-year $650 million unsecured multi-bank facility available for utilisation by appointed members of the Group and guaranteed by the Company. As at 31 December 2011 $225 million of letters of credit were issued under this facility. The facility has an expiry date of 31 December 2013.A bilateral facility available for utilisation by Catlin Bermuda, collateralised by pledged !nancial assets. As at 31 December 2011 $144 million of letters of credit were issued under this facility.A bilateral facility available for utilisation by Catlin Re Switzerland, collateralised by pledged !nancial assets. As at 31 December 2011 $9 million of letters of credit were issued under this facility.Two facilities available for utilisation by Catlin Bermuda for Funds at Lloyd’s purposes. As at 31 December 2011 $200 million of letters of credit were issued under these facilities. The facilities have an expiry date of 31 December 2015 and 31 December 2016 respectively.A facility managed by Lloyd’s, acting for the Syndicates. As at 31 December 2011 $7 million of letters of credit were issued under this facility.

In addition, Catlin US has letters of credit amounting to $6 million issued for the bene!t of state regulators and other parties.

Future lease commitmentsThe Group leases of!ce space and equipment under non-cancellable operating lease agreements, which expire at various times. Future minimum annual lease commitments for non-cancellable operating leases as at 31 December 2011 are as follows:


2012 $162013 212014 222015 192016 and thereafter 98

Total $176

Under non-cancellable sub-lease agreements, the Group is entitled to receive future minimum sub-lease payments of $15 million (2010: $9 million).

19 Related partiesThe Group purchased services from Catlin Estates Limited and Burnhope Lodge, both of which are controlled by a Director of the Group. The cost of the services purchased from Catlin Estates Limited and Burnhope Lodge in 2011 and 2010 was insigni!cant to the Group !nancial statements.

All transactions with related parties were entered into on normal commercial terms.

20 Subsequent eventsProposed dividendOn 8 February 2012 the Board approved a proposed !nal dividend of 19.0 pence per share (30.2 cents per share), payable on 16 March 2012 to stockholders of record at the close of business on 17 February 2012. The !nal dividend is payable in sterling.

Preferred share dividendThe Board of Catlin Bermuda approved a dividend of $22 million to the shareholders of the non-cumulative perpetual preference shares. This dividend was paid on 19 January 2012.

Management has evaluated subsequent events until 8 February 2012, the date of issuance of the !nancial statements.

Financial Statem

ents

96 Corporate Governance Catlin Group Limited Annual Report and Accounts 2011

Board of Directors


Sir Graham Hearne was appointed Chairman of Catlin in February 2003. He was Chairman of Enterprise Oil plc from 1991, having previously served as Chief Executive since 1984. Sir Graham quali!ed as a solicitor in England and Wales and practised law in England and the United States, following which he served as an executive of the Industrial Reorganisation Corporation and then as an Executive Director of NM Rothschild & Sons Limited. He was subsequently appointed Finance Director of Courtaulds plc and Chief Executive of two publicly listed oil and gas companies. He has served as a Director of a number of companies including Gallaher Group plc, Wellcome plc, Reckitt & Colman plc and Novar plc. He is currently Non-Executive Chairman of Braemar Shipping Services plc and a Non-Executive Director of Rowan Companies Inc, Bumi plc and Genel plc. He was High Sheriff of Greater London from 1995 to 1996. He was appointed a Commander of the Order of the British Empire in 1990 and a Knight Bachelor in 1998 for services to the oil industry.

Stephen CatlinChief Executive and Deputy Chairman

Stephen Catlin began his insurance career in 1973 joining BL Evens & Others on Syndicate 264 at Lloyd’s. He founded Catlin Underwriting Agencies Limited in 1984 and was the Active Underwriter of Syndicate 1003 and later Syndicate 2003 until May 2003. From 1996 to 2002, he was the Lloyd’s nominated Director of Equitas Holdings Limited. He served as Chairman of the Lloyd’s Market Association, the trade association representing the interests of Lloyd’s underwriters and underwriting agents, from 2000 until 2003. He was a member of the Council of Lloyd’s from 2002 until 2004 and a member of the Lloyd’s Franchise Board from 2003 until 2006. He was President of the Insurance Institute of London in 2010-2011 and is a Visiting Fellow at the Oxford University Centre for Corporate Reputation. He was selected as Ernst & Young’s ‘UK Entrepreneur of the Year’ in October 2011.

Benjamin MeuliChief Financial Officer

Benjamin Meuli was appointed an Executive Director of Catlin in June 2009 and became Chief Financial Of!cer in September 2009. He served as Chief Investment Of!cer and a member of the Executive Board of Swiss Re from 2004 to 2008. From 1998 to 2004 he served as a Managing Director of Morgan Stanley with primary responsibility for relationships with large multinational insurance groups. Prior to joining Morgan Stanley, he had a 20-year career with JP Morgan where he served as a Managing Director in charge of European Debt Capital Markets and the European Financial Institutions Group. He also served as Chief Executive of JP Morgan Life Assurance Ltd.

John BartonNon-Executive Director

John Barton was appointed as a Non-Executive Director of Catlin in December 2011. He has wide experience in the insurance industry and has served as a Director of a diverse range of companies. He was Chief Executive of insurance brokerage JIB Group for 13 years and later served as Chairman of Jardine Lloyd Thompson Group plc (the successor company to JIB). He also served as Chairman of Wellington Underwriting plc and Brit Holdings PLC, as well as a Non-Executive Director of W H Smith PLC and Hammerson plc. He is currently Chairman of Next plc and Cable & Wireless Worldwide plc.

Guy BeringerNon-Executive Director

Guy Beringer was appointed as a Non-Executive Director of Catlin in December 2009. He served as Senior Partner of Allen & Overy, the international law !rm, from 2000 until his retirement in 2008. He is Non-Executive Chairman of the Export Credits Guarantee Department and is Non-Executive Chairman of ATC Group. He is a Non-Executive Director of Fleming Family & Partners Ltd and London Irish Holdings. He was appointed a Queen’s Counsel (honoris causa) in 2006 for his contributions to pro bono and legal services.

97Corporate GovernanceCatlin Group Limited Annual Report and Accounts 2011

Bruce Carnegie-BrownSenior Independent Non-Executive Director

Bruce Carnegie-Brown was appointed as Senior Independent Non-Executive Director of Catlin in August 2010. He was formerly Managing Partner and founder of 3i Group plc’s quoted private equity division and was a member of 3i’s Group Management Committee. He previously served as Chief Executive Of!cer of Marsh Limited’s European and Middle Eastern operations and, prior to joining Marsh, spent 18 years at JP Morgan in a variety of roles, including Senior Credit Of!cer for Europe, Middle East and Africa, Chairman of JP Morgan Securities Asia based in Tokyo, and Head of Debt Capital Markets in Europe and Asia. He is a Non-Executive Director of Close Brothers Group plc and Moneysupermarket.com Group plc.

Jean Claude DamervalNon-Executive Director

Jean Claude Damerval was appointed as a Non-Executive Director of Catlin in July 2005. He has owned his own corporate !nance consulting practice focusing on the international insurance industry since 1994. Mr Damerval previously served as Group Managing Director and Chief Executive Of!cer of International Operations for AXA Group and as AXA’s Group Controller. He serves as a Non- Executive Director of Aurigen Re Capital Ltd, a Bermuda-based life reinsurer, and is an International Advisor of The Dai-Ichi Life Group, a Tokyo-listed Japanese life insurer.

Kenneth GoldsteinNon-Executive Director

Kenneth Goldstein was appointed as a Non-Executive Director of Catlin in May 2007. He was President and Chief Executive Of!cer of Universal Underwriters Group until his retirement in 1999. He also served as Executive Vice President of St Paul Fire & Marine Insurance Company, President of Swett & Crawford Management Co. and held various management positions at American International Group Inc. He previously was a Director of DirectFac Inc. and was a member of the advisory board of American Wholesale Insurance Group.

Robert GowdyNon-Executive Director

Robert Gowdy was appointed as a Non-Executive Director of Catlin in June 2009. He was President and Chief Executive Of!cer of CGU Insurance Group in the United States, from which he retired in 2001. He was the founder and Chief Executive Of!cer of American Sterling Insurance Company and also served as Chairman and Chief Executive Of!cer of Industrial Indemnity Company. He is a past-Chairman of the American Insurance Association and served as a Non-Executive Director of Patriot Insurance Company. He is a member of the Casualty Actuarial Society and the American Academy of Actuaries. He is a Non-Executive Director of Ivans Inc.

Nicholas LyonsNon-Executive Director

Nicholas Lyons was appointed as a Non-Executive Director of Catlin in August 2008. He was formerly a Managing Director of Lehman Brothers in London, where he headed the European Financial Institutions Group, from which he retired in 2003. Prior to joining Lehman Brothers, he held executive positions at JP Morgan and Salomon Brothers in London. He is Non-Executive Chairman of Miller Insurance Services Limited, an international specialist insurance and reinsurance broker based in London, as well as Chairman of Longbow Capital LLP. He is also a Non-Executive Director of Quayle Munro plc and Friends Provident Holdings (UK) Limited.

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Directors’ Report

The Directors present their report and the audited !nancial statements for the year ended 31 December 2011.

Results and dividendsThe Consolidated Statements of Operations on page 72 show net income to common stockholders of US$38 million (2010: US$337 million).

The Directors propose a !nal dividend of 19 pence per share, payable on 16 March 2012 to shareholders on the register at the close of business on 17 February 2011. An interim dividend of 9 pence per share was paid on 23 September 2011.

Principal activities and review of businessThrough its consolidated subsidiaries and subsidiary undertakings, the Company’s principal activity is property and casualty insurance and reinsurance underwriting. A review of the Company’s business and developments during the year is included in the Chairman’s Statement, the Chief Executive’s Review, the Strategic Review and other material on pages 10 to 69.

Substantial shareholdingsAt 8 February 2012 the Company had been noti!ed pursuant to the Financial Services Authority’s Disclosure and Transparency Rules of the following signi!cant holdings of voting rights in its shares:

Number of shares

Percentage of shares in

issue1

Invesco Perpetual 36,241,220 10.1%

M&G 20,033,072 5.6%

Veritas Asset Management (UK) 18,187,126 5.0%

1 Based on shares in issue at 8 February 2012 of 360,998,099.

DirectorsThe current Directors of the Company and their biographical details are shown on pages 96 and 97. Particulars of their interests in shares are given in this report and in the Directors’ Remuneration Report on page 105. Alan Bossin and Michael Crall retired as Directors on 12 May 2011. John Barton was appointed as a Director on 1 December 2011. In accordance with the UK Corporate Governance Code, all Directors will offer themselves for election as Directors at the 2012 Annual General Meeting (‘AGM’), with the exception of Sir Graham Hearne, Jean Claude Damerval and Guy Beringer, who will retire at the AGM. The Board has appraised the performance and reviewed the skills, experience and expected contributions of each in the context of the Board’s objectives and composition, and on that basis recommends their election. Subject to his election at the AGM, John Barton will succeed Sir Graham Hearne as Chairman.

Directors’ interestsDirectors’ interests in sharesThe bene!cial interests of the Directors in of!ce at the end of the !nancial year in the Common Shares of the Company at 31 December 2011 and at 1 January 2011, including the bene!cial interests of any connected person, are set out in the table below:

31 December 2011

number of common

shares1

1 January 2011

number of common

shares

John Barton 50,000 18,0402

Guy Beringer 10,000 10,000

Bruce Carnegie-Brown 10,000 10,000

Stephen Catlin 4,321,495 4,226,929

Stephen Catlin as one of the trustees of Catlin Settlement Trust 685,000 685,000

Jean Claude Damerval 14,000 14,000

Kenneth Goldstein 40,000 35,000

Robert Gowdy 19,350 9,350

Sir Graham Hearne 31,596 31,596

Nicholas Lyons – –

Benjamin Meuli 515,000 515,000

1 There has been no change in these interests since 31 December 2011 up to the date of this report.

2 John Barton was appointed as a Director on 1 December 2011. He held these shares at the date of appointment.

Directors’ share optionsNone of the Non-Executive Directors holds share options in the Company. Details of the Executive Directors’ share options are disclosed in the Directors’ Remuneration Report on pages 105 to 111.

Corporate governanceThe Corporate Governance Report, which includes reports from the Board’s Audit and Nomination Committees, immediately follows this report. The Directors’ Remuneration Report, which includes details of the Board’s Compensation Committee and is subject to approval by shareholders at the AGM, begins on page 105.

Strategic ReviewThe Strategic Review and the Financial Review, which include details of the Group’s development and performance and the management report required by Rule 4.1.8 of the Disclosure and Transparency Rules, are set out on pages 10 to 69.


Directors’ Responsibility Statement pursuant to Disclosure and Transparency Rule 4The Directors con!rm that, to the best of their knowledge:

the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, give a true and fair view of the assets, liabilities, !nancial position and pro!t or loss of the Group; andthe management report incorporated into the Strategic Review and the Financial Review include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Corporate responsibilityThe Board and the Company remain committed to high standards of corporate responsibility. Details of the Company’s social, environmental and ethical policies as well as its policy on treatment of its employees are set forth in the report on the Company’s Culture on page 47.

Political and charitable donationsThe Company made no political donations during the year. It is not the Company’s policy to make political donations. Details of the Company’s charitable donations are set forth on page 52.

Share capitalGeneralAs at 31 December 2011 the Company had an authorised share capital of US$5,000,000 divided into 500,000,000 common shares of US$0.01 each (‘Common Shares’), of which 360,990,321 were in issue. The Company’s shares are admitted to the Of!cial List and are traded on the London Stock Exchange (‘LSE’). The Common Shares themselves are not admitted to CREST (the electronic settlement system for the LSE), but dematerialised depositary interests representing the underlying Common Shares issued by Capita IRG Trustees Limited (‘Capita Trustees’) can be held and transferred through the CREST system (‘Depositary Interests’). The rights attaching to the Common Shares are governed by the Bermuda Companies Act 1981 and the Company’s Bye-Laws.

Rights attaching to sharesSubject to the detailed provisions of the Bye-Laws, shareholders may attend any general meeting of the Company and vote on any resolution put to the meeting by a show of hands. Each shareholder who is present in person or by proxy has one vote.

A poll may be demanded by at least three shareholders present in person or by proxy, or by the Chairman or by any shareholder(s) present in person or by proxy representing one-tenth of the total voting rights of shareholders entitled to vote at any such meeting. On a poll every shareholder who is present in person or by proxy or (being a corporation) is present by a representative has one vote for every Common Share of which he is the holder. No shareholder may vote or be included in a quorum if any call or other sum payable by him to the Company in respect of any share remains unpaid.

The deadline for exercising voting rights by proxy is not less than 48 hours or such other period as the Board may determine prior to the holding of the relevant meeting or adjourned meeting.

The Board may, subject to the Bye-Laws and Section 54 of the Bermuda Companies Act, declare a dividend to be paid to shareholders in proportion to the number of shares held by them, and such dividend may be paid in cash or wholly or partly in fully or partly paid shares. Dividends unclaimed within six years of declaration are forfeited and revert to the Company. In respect of

the Depositary Interests, under the terms of the arrangements between the Company and Capita Trustees, Capita Trustees will pay dividends due on the underlying Common Shares to the holders of such Depositary Interests, although the Company may pay dividends direct to the holders of the Depositary Interests should it so wish.

On liquidation the liquidator may divide the whole or any part or parts of the assets of the Company among the shareholders, in whole or part, in specie or in kind, for such values as the liquidator may deem fair.

Transfer of sharesThere are no restrictions on the transfer of the Common Shares in the Company other than:

The Board may in its absolute discretion decline to register any transfer of shares which is not fully paid provided it does not prevent dealings in the Company’s shares taking place on an open and proper basis;The Board may also decline to register any transfer if the instrument of transfer is in favour of more than !ve people or it is not satis!ed that all applicable consents and approvals required to be obtained prior to such transfer have been obtained;Certain restrictions may from time to time be imposed by laws and regulations (for example insider dealing laws);Pursuant to the Company’s share dealing guidelines whereby the Directors and employees of the Company (including their connected persons) require approval to deal in the Company’s shares; andWhere a person with at least a 0.25 per cent interest in the Company’s shares has been served with a disclosure notice and failed to provide the Company with information concerning interests in those shares.

DirectorsThe Company’s Bye-Laws provide that the number of Directors shall not be less than !ve nor more than such number as the Board may by resolution determine. Directors are subject to retirement by rotation in successive three-year cycles, although the Board intends that all Directors will stand for election every year. A retiring Director is eligible for re-election. Shareholders may nominate candidates for appointment as Directors by complying with certain requirements (including minimum notice required) set forth in the Bye-Laws.

The Board may appoint persons to be Directors either to !ll a casual vacancy or as an additional Director. The of!ce of a Director shall be vacated in the event of death, disability, bankruptcy, disquali!cation, resignation or request for removal by not less than three-quarters of the other Directors. The Bye-Laws provide for the appointment of alternate Directors.

A Director may be removed by a resolution of the shareholders at any general meeting provided that the relevant Director has been served with not less than 28 days’ notice and has the right to be heard on the motion for his removal. Section 93 of the Bermuda Companies Act does not apply to the Company. Any removal of a Director shall be without prejudice to any claim such Director may have for damages for breach of any contract of service between him and the Company.

Changes to the Bye-LawsNo Bye-Law may be rescinded, altered or amended and no new Bye-Law shall be made until the same has been approved by a resolution of the Board passed by a majority of the Directors and by a resolution of the shareholders by a 75 per cent majority.

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Directors’ Report continued

Power to issue sharesAt the 2011 AGM, authority was given to the Directors to allot unissued relevant securities (as de!ned in the Bye-Laws) in the Company up to a maximum aggregate nominal value of US$1,201,499, being an amount equal to one-third of the shares in issue on 1 March 2011. In addition, in accordance with the Association of British Insurers guidelines, the Directors were given authority to allot relevant securities in the Company up to a maximum aggregate nominal value of US$1,201,499 for a fully pre-emptive rights issue. Neither of these authorities was used by the Company. The Directors are seeking approval from shareholders to renew these authorities at the AGM to be held on 10 May 2012, further details of which are set out in the accompanying circular to shareholders.

A further special resolution passed at the 2011 AGM granted authority to the Directors to allot equity securities (as de!ned in the Bye-Laws) in the Company for cash on (a) a non-pre-emptive basis pursuant to a rights issue or other offer to shareholders and (b) otherwise up to an aggregate nominal value of US$180,225 (being equal to 5 per cent of the issued share capital of the Company as at 1 March 2011). That authority was not used by the Company. The Directors are also seeking approval from shareholders to renew this authority at the 2012 AGM, further details of which are set out in the accompanying circular to shareholders.

Repurchase of sharesAt the 2011 AGM, shareholders renewed the Company’s authority to purchase a maximum of 35,222,849 Common Shares. During the year this authority was not used by the Company. The Company is seeking from shareholders a renewal of the Directors’ authority to purchase the Company’s shares at the 2012 AGM, further details of which are set out in the accompanying circular to shareholders.

Significant agreementsThe Company and certain subsidiaries participate in a US$650 million letter of credit facility (the ‘Facility’) with a syndicate of banks. Under the terms of the Facility, upon a change of control, the parties have a 30-day period in which to negotiate satisfactory terms upon which to continue with the Facility. If no such agreement is reached within the 30-day period, the banks are not obliged to participate further on the Facility and may require, on 30 days’ notice, that all liabilities of affected letters of credit be reduced to zero or otherwise secured by the provision of full collateral cover. The Company and certain subsidiaries have also entered into two US$100 million letter of credit facilities in support of Funds at Lloyd’s; those agreements contain change of control provisions identical to the Facility above.

Certain reinsurance contracts under which the Company’s subsidiaries are reinsured may be subject to termination at the option of the counterparty in the event of a change of control.

Employee share schemesDetails of the Company’s employee share plans can be found on page 107.

Under the terms of the trust deed governing the Company’s Employee Bene!t Trust, the trustees are not allowed to vote in respect of any shares held in the trust.

Annual General MeetingThe Notice of Annual General Meeting, to be held at noon on Thursday 10 May 2012 at the Company’s of!ces at Washington House, 5th Floor, 16 Church Street, Hamilton, Bermuda HM 11, is contained in a separate circular to shareholders enclosed with this report.

AuditorsResolutions are to be proposed at the AGM to re-appoint PricewaterhouseCoopers as auditors to the Company and to authorise the Directors to !x the auditors’ remuneration. PricewaterhouseCoopers was !rst appointed in 1999.

By Order of the Board

Daniel PrimerCompany Secretary8 February 2012


Corporate Governance Report

Overview, basis of reporting and the UK Corporate Governance CodeThe Company, which is incorporated in Bermuda, aims to apply best practice in corporate governance and complies with all Bermuda statutory requirements and the UK Corporate Governance Code (the ‘Code’). The Company complied in all material respects with the Code during 2011; the Company’s auditors have reviewed the Company’s compliance to the extent required by the UK Financial Services Authority for review by auditors of UK-listed companies.

Board of DirectorsThe Board of Directors comprises a Non-Executive Chairman, two Executive Directors and seven Non-Executive Directors.

There were several changes to Board composition during 2011. Michael Crall and Alan Bossin, Non-Executive Directors, retired upon conclusion of the 2011 Annual General Meeting. John Barton was appointed Non-Executive Director on 1 December 2011. There were no other changes to Board membership during 2011 and 2012 up to the date of this Report.

During 2011 there were no material changes to the Chairman’s other commitments.

Independence of DirectorsThe Board considers all of the Non-Executive Directors – John Barton, Guy Beringer, Bruce Carnegie-Brown (Senior Independent Director), Jean Claude Damerval, Kenneth Goldstein, Robert Gowdy and Nicholas Lyons – to be independent within the meaning of the Code. Mr Gowdy also serves as an Independent Director of certain of the Group’s US subsidiaries. This is of signi!cant bene!t to the Group. He has no executive involvement, and the Board considers that he is independent in principle and in practice. None of the others has any executive or other role or relationship with the Company or management that would affect his objectivity, and all have proven to be independent in character and judgment.

With seven Non-Executive Directors, a Non-Executive Chairman and two Executive Directors, Board composition complied with the Code throughout 2011.

Board performance evaluationThe Board continually seeks to improve its procedures and performance. During 2011, the Board undertook a detailed self-appraisal and worked with management to re!ne and improve the quality of the information provided to it by the Company. As a result of that process, the Board and management have worked during 2011 to enhance the Board’s contribution to Group strategy, improve communication with shareholders, rationalise Board and Committee membership, ensure an appropriate level of externally provided professional development, improve the quality of information provided to the Board (both at and between meetings) and provide more exposure to a broader range of the Group’s management. In addition, throughout the year the Board heard regular presentations from various areas of the business and held regular meetings of all Non-Executive Directors in the absence of the Executive Directors.

Other performance reviews undertaken during 2011 include:

an internal review of the effectiveness of the Audit, Compensation, Investment and Nomination Committees;performance appraisals of individual Directors; andreview by the Non-Executive Directors of the Chairman’s effectiveness.

The internal reviews were conducted through a combination of meetings and appraisal forms, and recommendations arising from these reviews were implemented during the year.

During 2012, the Board and its committees will undertake externally facilitated effectiveness appraisals.

Board meetingsThe Board held !ve meetings in 2011. All Directors attended all meetings. In addition to these meetings, the Board held a two-day strategic planning session with senior management, which was attended by all Directors.

The Chairman met during the year with the Non-Executive Directors.

Responsibilities and proceduresThe Board is responsible for the leadership, strategic direction, prudential control and long-term performance of the Company. It has adopted a schedule of matters reserved to the Board for decision, which include the adoption of strategic or business plans, major transactions, investment strategy, major treasury or !nancial decisions, signi!cant borrowing, changes to capital structure, issuance of equity or debt securities, approval of public !nancial statements and the appointment of selected members of senior management. There was no change to the Board reserved matters during 2011.

The Board is responsible for ensuring the maintenance of proper accounting records which disclose with reasonable accuracy the !nancial position of the Company. It is required to ensure that the !nancial statements present a fair view for each !nancial period.

During 2011 the Board considered succession planning for senior executives and at the Board level. The succession planning was re#ected in the appointment of John Barton to the Board and as Chairman-designate, as well as in certain changes to senior management.

The Board has delegated to the Chief Executive Of!cer and to the Group Executive Committee (comprising the Executive Directors and other senior executives) authority to execute Board strategy and to manage the Company on a day-to-day basis, including approval of !nancial commitments below the levels requiring Board approval.

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The Board has delegated authority to the Nomination, Compensation and Audit Committees in accordance with governance best practice. The level of delegation is de!ned in terms of reference and described in the reports that follow. The Board has also delegated certain authority over management of the Company’s investments to an Investment Committee of the Board.

Management regularly provides to the Board information necessary to enable the Board to perform its duties; that information is provided principally in standard monthly reports covering key performance indicators and Group Executive Committee deliberations, comprehensive meeting papers, discussions with executives, and the Board and committee meetings. Further information is provided on an ad hoc basis as issues of interest arise. Directors are free to request from the Executive Directors and from other executives such information as they consider appropriate. The Board and its committees have unrestricted access to the Company’s professional advisors and are authorised to take independent professional advice at the Company’s expense.

Directors are able to discuss the business with employees at all levels.

The Board is regularly updated on capital, risk, regulatory and compliance developments, including Board governance matters. Additional brie!ng materials are available to any Director upon request.

The Board has adopted a formal division of responsibilities between the Chairman, who is responsible for running the Board and related matters such as Board induction and evaluation, and the Chief Executive, who is responsible for the day-to-day management of the business.

Directors are required to discuss any potential con#icts of interest with the Chairman.

Upon their appointments, new Directors receive a comprehensive induction programme covering amongst other things the Group’s history and business, the competitive environment, business plans and strategy, !nance, investor relations, governance and Directors’ responsibilities, and corporate responsibility.

Relations with shareholdersThe Company is committed to ongoing dialogue with its shareholders. Presentations to analysts and investors are made by senior management, including the Executive Directors, following the half-year and full-year results announcements and at other times during the year, including an Investor Day held in November 2011. The Executive Directors and other senior executives undertake an extensive programme of one-on-one investor meetings throughout the year.

With the assistance of its corporate brokers and investor relations advisors, the Company seeks feedback from investors following major presentations. This feedback is communicated to the Board. The Chairman and Non-Executive Directors are also available to meet major shareholders upon request.

Shareholders are encouraged to attend the 2012 Annual General Meeting.

Accountability and internal controlThe Directors are responsible for the Company’s systems of internal control and for taking reasonable steps to safeguard the assets of the Company and to prevent and detect reporting irregularities. For the year ended 31 December 2011, the Directors have reviewed the effectiveness of these systems, which are designed to provide reasonable, although not absolute, assurance against material avoidable loss or misstatement of !nancial information. These systems are also designed to manage rather than eliminate the risk of failure to achieve these objectives. Regular reports regarding internal controls are also made to the Board directly and/or through the Audit Committee.

During January 2012 a review of the effectiveness of the Company’s internal controls and risk management systems during 2011 was conducted under the direction of the Audit Committee and the Board pursuant to the Turnbull Report and related guidance. It included a review of the documentation of internal control systems, including the extent to which those controls are risk-based and are embedded in the organisation. The results of this review were presented to the Audit Committee and Board in February 2012.

The Company has an ongoing process, as part of its Risk and Control Framework, for identifying, evaluating and managing signi!cant risks (the risk management programme) and this has been in place throughout 2011 and up to the date of this report. The Board receives periodic reports from the Chief Risk Of!cer and/or the Audit Committee on the risk management programme.

The Chief Executives of each of the Company’s underwriting platforms are responsible for directing the risk management programme within their operations. The Chief Risk Of!cer, the Group Executive Committee and other senior executives review and monitor the identi!cation and assessment of signi!cant risks and the relevant control and monitoring procedures. In addition, they monitor the Company’s signi!cant risks on an ongoing basis. Action is taken where the need for further risk mitigation is identi!ed. Internal audits are conducted on an ongoing basis as part of a risk-based plan approved and monitored by the Audit Committee.

Financial reporting controlsThe Group operates a system of internal controls and risk management around its !nancial reporting process. The system is designed to mitigate, rather than eliminate, the risk of failure in this area. This system has been in place for the year under review and up to the date of approval of the Annual Report and !nancial statements. The key elements of the system are:

Core controls and sign-offs. The business operates a system of core controls including authority limits, reviews and reconciliations to support the !nancial reporting process. These are designed to ensure the completeness and integrity of !nancial records throughout the Group. These controls seek to identify and address key !nancial reporting risks, including risks arising from changes in accounting standards, as well as any areas of accounting judgment.

Corporate Governance Report continued


Financial performance monitoring and review. The Group produces a comprehensive monthly performance report of !nancial results for review by executive management and the Board. This includes an explanation of variances between actual and planned performance and a summary of key performance indicators and trends.Actuarial review. The Group’s loss reserves are subject to an independent actuarial review on an annual basis with full reporting to the Audit Committee and Board.Internal audit and risk management. The Group’s internal audit function carries out periodic reviews of the !nancial reporting process and the underlying controls throughout the Group’s operations, with formal reporting to management and the Audit Committee of recommendations for improvement. Progress on actions taken in response to internal audit reports is reported to the Audit Committee until appropriate steps are implemented to remedy each control observation.

The Group Risk function operates a risk register including an evaluation of all signi!cant risks relating to the !nancial reporting process. The register is reviewed and updated in conjunction with senior !nancial management on a quarterly basis.

Going concernThe Board is satis!ed that the Company has adequate resources to continue in operation for the foreseeable future. The Company’s !nancial statements therefore continue to be prepared on a going concern basis.

Report from the Nomination CommitteeThe Nomination Committee is chaired by Sir Graham Hearne, Non-Executive Chairman. Nicholas Lyons and Bruce Carnegie-Brown were members throughout the year. Michael Crall was a member until 12 May; Robert Gowdy joined the Committee on 3 August.

Terms of referenceThe Committee’s terms of reference, which are available on request from the Company Secretary and are published on the Company’s website, include identifying potential nominees for election to the Board; advising the Board on succession, retirement and re-election of Directors; reviewing the Board’s structure, size and composition; and participating in the Directors’ appraisal process.

MeetingsThe Nomination Committee met !ve times during 2011. All members attended all meetings.

ActivitiesThe Nomination Committee focused on the following areas during 2011:

Two Directors retired during the year and one new Director was appointed. The Committee, assisted by an external recruitment consultant, identi!ed John Barton as an individual whose extensive experience in the insurance sector and on plc boards would be complementary to the skills and experience of the other Directors. The Committee recommended his appointment to the Board; Mr Barton will stand for election at the 2012 AGM.The Chairman, Sir Graham Hearne, will retire at the AGM. The Committee considered possible successors and identi!ed John Barton, who has chaired the boards at other listed insurance holding companies, as the appropriate candidate.The Committee determined that, in accordance with the Code, that all Directors wishing to remain on the Board should stand for election at the 2011 and 2012 AGMs. The Chairman and the Committee appraised the performance of each Director who wished to continue serving and concluded that all continued to be effective in and committed to their roles, and accordingly recommended them for election.The Committee considered the impact on the Board and Committees of the retirement of three Directors following the 2012 AGM. Other than replacing the Chairman, the Committee recommended that no further appointments be made immediately. It also recommended that, with a lower number of Directors, that all Non-Executive Directors should serve on all Board committees. It is anticipated that this structure will foster better and more detailed engagement between the Non-Executive Directors and the Company.The Committee considered the future composition of the Board generally and in the context of the Davies Report. The Committee concurs with the conclusions of the report that diversity – of skills, experience and gender, amongst other factors – improve board performance but that quotas are not the best option for achieving diversity. As the Committee considers future Board composition and succession planning, it will seek applicants from a wide range of backgrounds to ensure that the candidates best equipped to contribute to Board deliberations are identi!ed.

Report from the Audit CommitteeThere was no change to membership of the Audit Committee during 2011. Nicholas Lyons was Chairman and the members were Guy Beringer Jean Claude Damerval, Kenneth Goldstein and Robert Gowdy. All are Independent Non-Executive Directors. The Chief Executive Of!cer, the Chief Financial Of!cer and other members of the Company’s management attend meetings by invitation of the Committee. The Board is satis!ed that throughout the year there has been at least one Committee member with recent and relevant !nancial experience.

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Corporate Governance Report continued

Terms of referenceThe Committee’s terms of reference, which are available on request from the Company Secretary and are published on the Company’s website, require it to monitor the integrity of the Company’s !nancial statements and the systems and controls supporting them.

The Committee is also required to:

recommend to the Board the appointment, removal and remuneration of independent external auditors;monitor and assess the effectiveness of the Company’s systems of internal controls and risk management;discuss major !nancial risk exposures with management, including risk assessment and risk management policies; andmonitor and review the effectiveness of the Company’s Internal Audit function.

The Committee recommended the re-appointment of PricewaterhouseCoopers (‘PwC’). PwC has been the Group’s auditor since 1999. The Committee continues to be satis!ed with PwC’s performance, independence, audit partner rotation policy and cost.

There are no contractual obligations restricting the Group’s choice of external auditor.

The Committee is responsible for approving all appointments of PwC to provide non-audit services, subject to a de minimis threshold of US$25,000. Such appointments are approved only if the Committee is satis!ed that the independence and objectivity of the auditors will not be undermined by the nature or value of the non-audit work and that there are compelling reasons to use the external auditors rather than another service provider. The total paid to the external auditors in 2011 for audit services was US$2,723,425 (2010: US$1,067,943); the total paid in 2011 for non-audit services was US$152,477 (2010: US$1,040,042). The non-audit services, which related to a variety of issues including assistance with an Internal Revenue Service audit of the US employee 401(k) plan and participation in a London insurance market response to IASB Exposure Draft on Accounting for Insurance Contracts, are insigni!cant individually and in the aggregate.

MeetingsThe Committee met four times during 2011. All members attended all meetings.

ActivitiesFinancial reporting

The Committee reviewed the 2010 year-end and 2011 half-year !nancial results. It considered updates on accounting policy matters.It met with external and Company actuaries to discuss technical loss reserves and areas of greatest reserving uncertainty.Following full meeting reports, the Committee met privately with the external actuaries without management present.It reviewed proposed public !nancial statements.The Committee reviewed progress on planned improvements to the !nancial reporting systems.

External auditThe Committee met with the external auditors regarding their 2010 full-year audit, 2011 half-year review and the plan for the 2011 year-end audit. Following the full meeting reports, the Committee met privately with the external auditors without management present.The plan for the annual external audit work was approved, along with related fees.The Committee assessed the effectiveness of the external auditors. It discussed the auditors’ independence and rotation plans.The Committee reviewed and approved all material non-audit assignments to PwC.

Internal audit and riskThe Committee received regular reports on the !ndings from the programme of internal audits. Following the full meeting reports, the Committee met with the Head of Internal Audit without management present.The 2012 internal audit programme was reviewed and agreed.Key !nancial risks and other risks were identi!ed and discussed with management. The Committee considered special reports and presentations on enterprise risk management, Group capital model, Solvency II and other risk topics.The Committee directed and reviewed the assessment of effectiveness of internal controls and risk management systems.The Committee reviewed reports on regulatory compliance, including the Group’s whistle-blowing policy. Following the full meeting reports, the Committee met with the Group Compliance Of!cer without management present.

OtherThe Committee received regular reports from the General Counsel on legal matters.The Committee reviewed Directors’ expenses.The Committee reviewed its terms of reference and conducted an assessment of how it had discharged its responsibilities.The Committee has undertaken an ongoing training and education programme to keep up-to-date with accounting, regulatory, governance and other relevant developments.

By Order of the Board

Daniel PrimerCompany Secretary8 February 2012


Directors’ Remuneration Report

This report to shareholders describes the Company’s remuneration policy and the remuneration of its Directors for the year ended 31 December 2011. The report has been prepared in accordance with the UK Corporate Governance Code, Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Listing Rules of the UK Listing Authority. The sections of this report entitled ‘Directors’ Emoluments’ and ‘Options Over Shares’ have been audited by PricewaterhouseCoopers. The remainder of the report is unaudited.

This report provides the most up-to-date information available on Directors’ remuneration. Bonuses are disclosed on an accrued, rather than paid, basis. Accordingly, bonuses relating to performance during 2011 are reported here, although they will be paid early in 2012. Bonuses paid during 2011 but relating to 2010 performance were disclosed in last year’s report and are not repeated here.

Compensation CommitteeBruce Carnegie-Brown was Chairman of the Committee, and Guy Beringer and Jean Claude Damerval were members throughout 2011. Michael Crall was a member until he retired from the Board at conclusion of the 2011 Annual General Meeting in May. All members were independent within the meaning of the Combined Code throughout the year. The Committee met !ve times in 2011; all members attended all meetings.

Terms of referenceThere was no change to the Committee’s terms of reference during 2011. Its role and responsibilities include assisting the Board in setting policy for the remuneration of the Chairman, the Executive Directors, other senior executives and all Group employees. Within that policy, the Committee establishes remuneration packages for the Chairman, the Executive Directors and other senior executives. It is also responsible for agreeing aggregate salary increases for all Group employees, agreeing bonus plans, establishing performance targets and individual awards under share incentive plans, and recommending to the Board any major changes to employee bene!t structures throughout the Group. The Committee’s terms of reference are available on request from the Company Secretary and appear on the Company’s website.

Use of advisorsThe Committee uses consultants when it considers that outside advice would be helpful in discharging its responsibilities. Deloitte LLP is the principal outside advisor and during 2011 advised the Committee on developments in compensation best practice, bonus plan modelling, senior executive compensation and contracts, and benchmarking. Deloitte also provided a non-material level of services to other Group companies worldwide, primarily on issues related to human resources and expatriate employee tax. The Committee believes that the objectivity of the advice received from Deloitte is not affected by the other services it provides to the Group.

The Committee receives information and assistance from various members of management, principally the Group Head of Strategic Human Resources. No executives participate in Committee deliberations relating to their own remuneration. The Company Secretary acts as secretary to the Committee.

Policy on remuneration of Executive Directors and senior executivesAs in previous years, the Company’s policy is to offer remuneration packages that attract, retain and motivate staff of high calibre and suitable experience. Remuneration, particularly with respect to the Executive Directors (Stephen Catlin and Benjamin Meuli) and other senior executives, is designed to create incentives to meet the !nancial and strategic objectives set by the Board for the Company, primarily through variable bonus and share plan components. This policy aims to align executive rewards with the creation of shareholder value over time rather than with short-term or revenue-driven measures. Accordingly, variable elements of compensation depend on the !nancial performance of the business and are aligned with the Group’s key performance indicators, in particular return on equity, pro!t before tax and growth in net asset value per share measured over periods of one to four years. In addition to those factors, the Committee considers all aspects of Company performance – including its performance on environmental, social and governance matters – in establishing remuneration. Remuneration is considered across the Group as a whole taking into account external and internal relativities, the economic climate, changes in responsibilities and market movement. The Company does not review the compensation of one individual group in isolation to another.

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The Committee reviews on an ongoing basis the Group’s policy on remuneration and executive compensation packages in light of best practice exempli!ed by the UK Financial Services Authority’s Remuneration Code and various other pronouncements by regulators, shareholder advocacy groups and governance commentators. The Committee considers, for example, whether incentives are compatible with the Group’s risk appetite and promote the long-term success of the Group, the extent to which performance conditions attaching to variable compensation are challenging and consistent with the Group’s objectives, and whether the compensation structure avoids rewarding executives for failure. The Committee considers that for 2011 and 2012 the Group’s incentive schemes, including those applicable to Executive Directors, are practically and philosophically consistent with best practice. Further detail is provided below in the commentary relating to speci!c aspects of Group compensation, but in summary the Committee believes that:

the overall compensation structure aligns executives with shareholders;remuneration packages, particularly those of senior executives, are designed to promote the long-term success of the Company;the incentives do not encourage risk-taking that is excessive or beyond the risk appetite de!ned by the Board and re#ected in the annual business plan;performance conditions relating to variable compensation are challenging, aligned to corporate objectives and do not reward failure;there is an appropriate balance between !xed and variable compensation and between short-term and long-term incentives;pay structures across the Group are reasonably proportionate; andcompensation policy for 2012 fairly re#ects the challenging economic and operating environment.

Basic salaryBasic salaries and related bene!ts are determined having regard to employees’ responsibilities, contributions, quali!cations and the distribution of salary across all employees in the Group; they are set at a level suf!cient so that employees are not unduly dependent on bonuses. Basic salaries are intended to be competitive with those offered by similar organisations in the jurisdictions in which the

Company operates, without being excessive. Salaries are reviewed annually before year-end, and any increases are based upon changes in the scope of employee responsibilities, personal appraisal levels, relative compensation levels throughout the Group, in#ation, market trends and such other considerations as the Committee considers relevant. For comparative purposes, the Company keeps competitors’ remuneration structures under review and undertakes regular compensation and bene!ts surveys, but uses such comparisons cautiously to avoid unwarranted increases.

Mr Catlin did not receive a basic salary increase for 2012 (nor did he receive one in any of 2008, 2009 or 2011). For 2010 he received an increase of 2.46 per cent. Mr Meuli received a basic salary increase for 2012 of 2.7 per cent (2011: nil increase).

Bonus arrangementsThe Group operates a single bonus plan (‘Bonus Plan’). The Bonus Plan is non-pensionable for Executive Directors, and all Group employees, including the two Executive Directors, are eligible to participate. The bonuses relating to the 2011 !nancial year, payable early in 2012, are reported here. Bonuses paid in 2011 but relating to the 2010 !nancial year were disclosed in last year’s report.

Operation of Bonus Plan in 2011Last year, the Company reported various changes in the Bonus Plan. For 2011, it operated as follows:

The Bonus Pool for 2011 comprised two elements: a pro!t-related bonus and a personal performance bonus.No bonus pool applicable to the Pro!t-Related Bonus is accrued until return on equity is positive, at which point a percentage of pro!t before tax is payable. The maximum percentage of pro!t before tax payable in aggregate under this element is 10.6 per cent (at a 25 per cent return on equity).The Personal Performance Bonus is an element of the bonus related purely to personal performance and is in the aggregate equal to a maximum of approximately 10 per cent of basic payroll.Individual allocations, including those to Executive Directors, are at the discretion of the Committee. Primarily, amounts are based on !nancial results and individual performance. However, the Committee is authorised to consider all aspects of Company performance in establishing bonuses payable to Executive Directors. This includes, for example, prudent risk and capital management.The Committee is responsible for ensuring that bonus awards appropriately re#ect the performance of both the business and the recipients.There is no formal cap on individual awards, but the total bonus pool is capped.Bonuses are paid in cash without deferral.The total bonus pool for 2011 comprised Personal Performance Bonus and a small Pro!t-Related Bonus. Together, they amounted to US$21.8 million, representing approximately 10.8 per cent of the Group’s total salary costs.

Directors’ Remuneration Report continued


Operation of Bonus Plan in 2012For all employees, with the exception of the Chief Executive (as discussed below), the Bonus Plan will operate in 2012 in the same manner in which it operated for 2011.

The Committee regularly reviews the competitiveness and effectiveness of incentives. Following a review in 2011 and re#ecting shareholder feedback and the changing regulatory and executive remuneration environment, the Committee has decided to make a number of changes to the way in which the annual bonus operates for the Chief Executive. The purpose of these changes is to provide an unambiguous link to the delivery of value in the business and to bring arrangements more in line with both market practice and emerging best practice. The changes are intended to take effect for the Chief Executive for the 2012 bonus and are as follows:

Introduction of cap, deferral, and clawback provisions, and the removal of the Personal Performance Bonus in its entirety.Introduction of a cap. Previously, there was no limit on the maximum bonus that could be paid to the Chief Executive. A cash bonus limit has now been set at 130 per cent of salary. An overall limit of 300 per cent of salary has also been introduced.Introduction of deferral into shares. Previously, bonuses for the Chief Executive were paid in cash with no deferral. From 2012, any bonus amounts exceeding 130 per cent of salary will be deferred into Company shares for a period of up to !ve years. Vesting is in three equal tranches on the third, fourth and !fth anniversary of the date of deferral.Introduction of clawback for shares deferred under the annual bonus. In the event of either a material mis-statement of the Company’s audited results upon which the bonus was determined or serious individual misconduct, the Committee has the discretion to reduce or cancel the number of unvested shares subject to deferral under the annual bonus.Removal of the Personal Performance Bonus (approximately 10 per cent of salary for individual performance) for the Chief Executive.No change to the total bonus pool cap.

Share plansThe Company seeks further to align interests between Executive Directors, employees and shareholders by facilitating share ownership. This is achieved through four active share incentive plans:

The Performance Share Plan (‘PSP’), adopted by the Company in 2004. Awards are made under the PSP annually; awards made to Executive Directors during 2011 and planned for 2012 are set forth below.A UK Inland Revenue-approved save-as-you-earn plan (‘SAYE’), open to all UK employees.A US Internal Revenue Service-approved employee share purchase plan (‘ESPP’), open to all US employees.A plan similar to the SAYE open to employees in various other Group of!ces (‘ROW Plan’).

During 2011, awards to Executive Directors were made under the PSP and ROW Plan. Non-Executive Directors do not participate in any of the plans.

There are two inactive share plans in existence: a Share Option Plan adopted contemporaneously with the PSP, under which no awards have ever been or are currently planned to be made, and the Long-Term Incentive Plan (‘LTIP’), adopted in 2002. The last LTIP awards were made prior to the Company’s initial public offering in 2004, and no further awards will be made.

Executive Directors are also encouraged to develop and maintain a meaningful shareholding (equal in value to 100 per cent of base salary over a period of three years and 200 per cent over !ve years). The stake can be built over time through participation in the Group’s share incentive plans. The Committee considers that this policy enhances the long-term alignment of interests between shareholders and the Executive Directors; both Executive Directors comply as of the date of this report.

Performance Share PlanThe PSP was adopted by the Company in 2004 and is designed to reward participants for delivering growth in shareholder value.

PSP participation is spread broadly across the Group, with approximately 700 participants in 2011 and 2012. The PSP provides for conditional awards of shares (or nil-cost options), vesting of which depends on achievement of performance conditions calibrated to the creation of shareholder value. The performance conditions require that growth in net asset value plus dividends declared per share during the Relevant Period exceed US dollar Libor plus 5 per cent per annum. At that level, 30 per cent of the award would vest, increasing on a straight-line basis to 100 per cent vesting at US dollar Libor plus 10 per cent. For awards made during 2011, the Relevant Period is 2011 to 2013 (inclusive) as to half of the award, and 2011 to 2014 for the balance. The Relevant Periods for awards made during 2012 are 2012 to 2014/2015. In addition, upon vesting participants receive shares purchased in the market with notional dividends accrued on the underlying PSP award (‘Dividend Shares’), but only to the extent that the underlying awards vest. Subject to limited exceptions, individual awards normally vest only if the participant is still employed by the Group upon vesting.

The PSP is limited such that no award may be granted if the total number of shares to be issued to satisfy awards under the PSP and other share plans during the period of ten years prior to such grant (but excluding any awards granted prior to the Company’s initial public offering in 2004) would exceed 10 per cent of the issued ordinary share capital of the Company on the date of grant. The Company also has discretion to and expects to satisfy awards under the PSP (or other subsisting share plans) with shares purchased in the market by the Catlin Employee Bene!t Trust (‘EBT’). The Committee intends that the EBT will at no time hold shares exceeding 5 per cent of the outstanding share capital. Subject to Committee discretion, individual annual awards will not ordinarily exceed twice the participant’s basic salary.

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The Committee during 2011 reviewed the PSP in light of actual performance and best practice, and it concluded that it remained effective to align employees with shareholders and for retention. The performance condition (which has not been changed) remains challenging, as re#ected by the level of vesting as set forth below. The Committee also believes that the three- and four-year measurement periods create a strong long-term incentive.

Directors’ PSP participation during 2011 and 2012Annual awards under the PSP were made to the Executive Directors during 2011 and will be made during 2012. Stephen Catlin received an award of nil-cost options over 338,415 shares in February 2011 and will in February 2012 receive an award of options over 296,659 shares. Benjamin Meuli received an award of nil-cost options over 295,596 shares in February 2011 and will in February 2012 receive an award of options over 284,186 shares. The notional value of the awards (subject to vesting and not including potential Dividend Shares) was approximately £1,332,100 and £1,331,998 for Mr Catlin and £1,250,649 and £1,275,995 for Mr Meuli for 2011 and 2012, respectively.

Two tranches of PSP awards were eligible to vest during 2011: the second half of awards made in 2007 and the !rst half of awards made in 2008. In the event, the 2007 award vested 65.4 per cent; the 2008 award had nil vesting. During 2012, awards made in 2008 and 2009 will be eligible to vest; based upon achievement of the performance conditions, none of the 2008 award will vest and the 2009 award will vest 100 per cent.

Executive Directors’ awards vesting in 2012 are as follows:

Vested 2009 PSP award

Vested 2009 Dividend

Shares

Stephen Catlin 141,3001 33,389

Benjamin Meuli 106,6352 23,517

1 Award vests February 20122 Award vests September 2012

LTIPThe LTIP was adopted in 2002. Subsisting awards under the LTIP comprise options to purchase shares at US$4.37 per share and at £3.06 per share, and all outstanding options have vested. No options have been issued under the LTIP since the Company’s IPO and listing on the London Stock Exchange in 2004, and no further awards will be made. Details of outstanding awards to Directors are set forth below.

SAYEThe SAYE was adopted at the 2008 AGM and is an ‘all-employee’ plan on standard HMRC-approved terms. Under the SAYE eligible employees are able to apply for options over the Company’s Common Shares which vest in three years under a savings contract of equal duration. The option exercise price for the 2011 plan is at a discount of 20 per cent from the share price at the time employees were invited to participate in the Scheme. It is anticipated that the SAYE will be offered again in 2012 on substantially identical terms. No Directors participate in the SAYE.

ESPPThe ESPP was adopted at the 2008 AGM and is an ‘all-employee’ plan on standard US Internal Revenue Service terms. Under the ESPP, eligible employees are able to apply for options over the Company’s Common Shares which become exercisable at the end of a 12-month savings period. Participants will fund the exercise of their options by way of salary deductions throughout the period. The option exercise price for the 2011 plan is a discount of 15 per cent from the share price at the time employees were invited to participate in the scheme. It is anticipated that the ESPP will be offered again in 2012 on substantially identical terms. No Directors participate in the ESPP.

ROW PlanThe ROW Plan, which is an extension of the SAYE, was authorised at the 2008 AGM but was !rst implemented during 2009. Under the ROW Plan, eligible employees based in the Group’s of!ces in Bermuda, Canada, Germany, Malaysia, Singapore and Switzerland are eligible to apply for options over the Company’s Common Shares which vest in three years under a savings contract of equal duration. The option exercise price for the 2011 plan is at a discount of 20 per cent from the share price at the time employees were invited to participate in the Scheme. It is anticipated that the ROW Plan will be offered again in the same locations in 2012 on substantially identical terms and possibly extended to other locations. Mr Meuli participates in the ROW Plan; details are set out below.

Other benefitsPrivate medical insurance, personal accident/travel insurance and life insurance are purchased for the bene!t of the Executive Directors. In addition, Mr Catlin is provided with permanent health insurance. Along with other executives, Mr Catlin also has use of a Bermuda residence.

PensionsFollowing changes in UK pension legislation, the Company on 5 April 2006 ceased contributing to Mr Catlin’s pension. Instead, the Company now pays a cash supplement amounting to 20 per cent of base salary per annum. Mr Meuli is entitled to an employer’s pension contribution amounting to 15 per cent of his base salary per annum; the total amount paid in 2011 was US$152,573. Of the 15 per cent employer’s contribution provided to Mr Meuli, 14.2 per cent is paid to Mr Meuli as a cash supplement and the balance is paid to a Swiss pension plan.



Service contractsStephen Catlin is employed as Chief Executive Of!cer pursuant to a contract dated 5 April 2006. Mr Meuli is employed as Chief Financial Of!cer pursuant to a contract with effect from 1 September 2009. The contracts require 12 months’ notice of termination of employment and do not provide for additional compensation to be paid in the event of termination. The Executive Directors serve as such subject to the Bye-Laws and to re-election from time to time at the Company’s AGMs. No additional compensation is payable to Executive Directors for serving as a Director or upon ceasing to serve as a Director.

External appointmentsAt the discretion of the Board, an Executive Director is permitted to accept directorships or similar positions in non-competing ventures to the extent that they do not interfere or con#ict with the Director’s obligations to the Company. In normal circumstances, the Director is permitted to retain remuneration received in that capacity.

During the reporting period and up to March 2012, neither Executive Director served as a director for remuneration with any other entity.

Non-Executive DirectorsNon-Executive Directors serve pursuant to letters of appointment, details of which are as follows:

Date of current appointment letter Unexpired term

John Barton 9 August 2011 Until 2012 AGM

Guy Beringer 11 December 2009 Until 2012 AGM

Bruce Carnegie-Brown 14 September 2010 Until 2012 AGM

Jean Claude Damerval 6 July 2005 Until 2012 AGM

Kenneth Goldstein 7 June 2007 Until 2012 AGM

Robert Gowdy 25 August 2009 Until 2012 AGM

Sir Graham Hearne 13 January 2005 Until 2012 AGM

Nicholas Lyons 11 August 2008 Until 2012 AGM

Non-Executive Directors’ appointment letters do not specify a term, as all appointments are conditional on re-election from time to time at the Company’s AGM. The ‘unexpired term’ shown above re#ects the Company’s intention to submit all Directors to re-election annually. Non-Executive Directors’ appointments are subject to 90 days’ notice of termination. Sir Graham Hearne would be entitled, subject to re-election at the AGM, to nine months’ compensation (in addition to the 90-day notice period) if his appointments were terminated by the Company without cause, with a maximum liability to the Company of US$244,125. He does not have any executive role with the Company.

The appointment letters and service agreements are available for inspection at the Company’s registered of!ce and at the of!ces of Catlin Holdings Limited at 20 Gracechurch Street, London EC3V 0BG during normal of!ce hours.

The Board reviews the fees payable to the Chairman and Non-Executive Directors annually. The Board elected not to increase fees payable to Non-Executive Directors during 2011. The fees are £210,000 for the Chairman, £77,500 for the Senior Independent Director and £57,500 for the other Non-Executive Directors. The Chairman of the Audit Committee receives a supplement of £25,000; the Chairman of the Compensation Committee receives a supplement of £15,000; and the Chairman of the Investment Committee receives a supplement of £10,000. Members of the Audit Committee receive a supplement of £2,500.

Directors’ fees are denominated in sterling but are reported in the table below in US dollars.

Neither the Chairman nor the Non-Executive Directors participate in any performance-related remuneration, or in any pension, bonus or share plans.

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Directors’ emolumentsThe aggregate emoluments paid to or receivable by Directors for services to the Company and its subsidiary undertakings for the 2011 !nancial year, together with comparatives for the previous year, are as follows:

US$ Salary Fees Bonus3 Bene!ts 4 Total 2011 Total 2010

John Barton – 13,478 – – 13,478 –

Guy Beringer – 96,400 – 12,949 109,349 98,649

Alan Bossin – 33,762 – – 33,762 86,987

Stephen Catlin 1,370,3001 – 192,000 150,347 1,712,647 2,026,852

Bruce Carnegie-Brown – 148,400 – 15,720 164,120 62,162

Michael Crall – 40,429 – – 40,429 100,211

Jean Claude Damerval – 96,728 – – 96,728 92,489

Kenneth Goldstein – 97,454 – – 97,454 88,848

Robert Gowdy – 107,662 – 25,370 133,032 88,848

Sir Graham Hearne – 336,000 – 18,989 354,989 316,318

Nicholas Lyons – 132,400 – 15,984 148,384 114,365

Benjamin Meuli 1,161,2292 – 172,890 104,976 1,439,095 1,609,101

1 Included within Mr Catlin’s salary is a cash supplement of US$213,093, equal to 20 per cent of his base salary, paid in lieu of Company pension contributions. Also included is US$91,608 paid to reverse incorrect deductions for National Insurance and to correct a mathematical error in his pension contributions between April 2006 and December 2010.

2 Included within Mr Meuli’s salary is US$144,229 which is a cash supplement, equal to 14.2 per cent of his base salary, paid in lieu of Company pension contributions.3 Bonuses were earned during 2011 but will be paid early in 2012.4 Bene!ts reported for the Non-Executive Directors and a portion of the bene!ts reported for the Executive Directors comprise the cost of spouses’ travel when

accompanying the Board during its strategic planning meetings.

The Board determines the fees paid to the Chairman and Non-Executive Directors by reference to market rates and the time, skills and commitment required.

Options over sharesThe closing price for the Company’s shares on 30 December 2011 was 398.7 pence, and the range during the year was 327.8 pence to 426.7 pence. The closing price for shares on 8 February 2012 was 426.4 pence.

Performance graphThe graph below shows the total shareholder return for the Company’s common shares from 1 January 2006 to 31 December 2011 compared with that of the FTSE 350, which the Board considers to be an appropriate comparator group. Total shareholder return comprises changes in share price plus dividends paid.

2011201020092008200780

100

120

140

160

180

200 Catlin +21.6% FTSE 350 +7.1%



The table below shows options outstanding under the LTIP at year end. All of those awards were granted during prior !nancial years.

Exercise period

Number of shares subject

to option at 1 January 2011


to option at 31 December

2011 Exercise price From To

Stephen Catlin 2,940,368 2,940,368 $4.37 Now 4 July 2012

The table below shows PSP activity, including awards made, during 2011.

Award date



Awarded during 2011 (number of

shares subject to option



2011

Number of options exercised

during 2010 Vesting date

Stephen Catlin 10 February 2011 1,067,591 338,4151 1,157,1232 71,5713Up to 280,746

in February/March 2012Up to 339,630

in February 2013Up to 367,540

in February 2014

Up to 169,207 in February 2015

Benjamin Meuli 10 February 2011 534,248 295,5961 829,8442 –Up to 106,635

in September 2012Up to 160,489

in February 2013; Up to 106,635

in September 2013Up to 308,287

in February 2014Up to 147,798

in February 2015

1 The price of the Company’s shares on 10 February 2011 was 393.6 pence.2 Subject to the vesting of the underlying PSP awards, the Executive Directors have bene!cial interests in the Dividend Shares held by the trustees of the Catlin Group

Employee Bene!t Trust.3 The Company’s share price upon exercise of 77,571 options was 338.3 pence per share. In addition, Mr Catlin received 20,112 Dividend Shares upon the exercise of his

options.

The table below shows awards made during 2011 under the ROW plan.

Exercise period





2011 Exercise price From To

Benjamin Meuli – 3,019 £2.96

1 November

201430 April

2014

The Directors’ Remuneration Report was approved by the Board of Directors on 8 February 2012 and was signed on its behalf by:

Daniel PrimerCompany Secretary

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Investor Relations

Catlin recognises its responsibility to keep shareholders and the investment community up to date with developments affecting the Group.

Members of the Group’s management team make presentations to analysts following the announcement of the annual and interim results. In addition, Catlin holds an annual ‘Investor Day’ for institutional investors and analysts; the Investor Day held on 24 November 2011 focused on investment strategy and capital management.

Catlin’s management also meets frequently with analysts and institutional investors. During 2011 management met with more than 160 existing or potential equity investors.

Shareholders receive printed copies of the Annual Report and Accounts and the Half-Yearly Results Statement. The Catlin Group website also contains detailed information for shareholders and the investment community (www.catlin.com/investors). The website includes:

current share price information and modelling tools;key !nancial information;past annual reports;webcasts of presentations to analysts and the annual Investor Day (webcasts are available on demand for six months following an event); andall announcements made by the Group through the Regulatory News Service in the UK.

The Group’s website also includes all media announcements made by Catlin.

With the assistance of the Group’s corporate brokers and investor relations advisors, management and the Board of Directors receive feedback from investors following major presentations.

Catlin share information Table 1

Ticker symbol (London Stock Exchange) CGL

Closing price at 31 December 2011 398.7 pence

Closing price at 31 December 2010 370.0 pence

2011 share price performance +7.8%

2011 total shareholder return +15.5%

Maximum price during 2011 426.7 pence

Minimum price during 2011 327.8 pence

Average daily trading volume (London Stock Exchange) 979,000

Average daily trading volume (all platforms) 2,392,000

Market capitalisation at 31 December 2011 £1.44 billion

Market capitalisation at 31 December 2010 £1.33 billion

Ranking in FTSE 350 at 31 December 2011 148

Ranking in FTSE 350 at 31 December 2010 169

Catlin shares and shareholder baseCatlin Group Limited common shares are listed on the London Stock Exchange (trading symbol ‘CGL’) under ‘Insurance’. The Company’s share price is available on all recognised online databases as well as on a daily basis in UK newspapers including the Financial Times, The Times, The Daily Telegraph, The Independent and the Evening Standard.

At 31 December 2011, there were 1,875 shareholders on the Group’s register (2010: 1,966). The breakdown of these shareholders is analysed in Table 2 and Charts 3, 4 and 5.

Breakdown of shareholders at 31 December 2011 Table 2

Shares ownedNumber of

shareholdersPercentage of shareholders

Total shares owned

Percentage of total shares

0-50,000 1,556 82.99 7,161,422 1.98

50,001-100,000 77 4.11 5,628,818 1.56

100,001-500,000 140 7.47 31,748,085 8.79

500,001-1,000,000 34 1.81 23,353,663 6.47

1,000,001-5,000,000 50 2.67 101,870,774 28.22

5,000,001-10,000,000 12 0.64 81,536,689 22.59

More than 10,000,001 6 0.32 109,690,870 30.39

Total 1,875 100.00 360,990,321 100.00

Catlin aims to keep the investment community informed of developments affecting the Group

Summary

7.8 per cent increase in share price in 201115.5 per cent total shareholder return in 2011With the payment of the 2011 dividend of 28 pence, Catlin has increased its annual dividend by 159 per cent since its IPO in 2004


Shareholders by type at 31 December 2011 Chart 3

Private shareholders Corporate, nominee and institutional

51%49%

Shareholders by percentage of shares held at 31 December 2011 Chart 4

Private shareholders Corporate, nominee and institutional

90%

10%

Shareholders by location at 31 December 2011* Chart 5

United Kingdom Europe United States and Canada Rest of World

31%5%

30%

1%

* Includes owners of 25,000 or more shares where location is known

A listing of Catlin’s major shareholders (those which hold 3 per cent or more of the Company’s share capital) is available on the Catlin website and is updated regularly.

Total shareholder returnCatlin shares produced a total shareholder return of 21.6 per cent from 1 January 2007 through 31 December 2011. The total shareholder return from Catlin shares during this period is compared with that of the FTSE 350 Index in Chart 6.

Total shareholder return – 1 January 2007 through 31 December 2011 Chart 6

20112010200920082007

Catlin +21.6% FTSE 350 +7.1%

200

160

180

140

100

120

80

Analyst coverageDuring the past year, 23 analysts have published research notes regarding the Group. Current analysts and their contact information are listed in the Investor Relations section of the Catlin website.

DividendsCatlin is committed to providing an attractive return to shareholders through dividends. The payment of dividends is linked to recent trends in the Group’s performance as well as to its future prospects. The Group aims to increase dividends incrementally on a year-to-year basis.

The !nal dividend for the year ended 31 December 2011 of 19 pence per share is payable on 16 March 2012 to shareholders of record at the close of business on 17 February 2012.

Chart 7 shows the Group’s dividend history. Since its initial public offering in 2004, Catlin has increased its annual dividend by 159 per cent.

Dividends on Catlin common shares are payable in sterling. Dividends on Catlin American Depositary Receipts (‘ADRs’) are payable in US dollars by the US depositary bank.

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Dividend history1 pence Chart 7

20112010200920082007

30

25

20

15

5

0

10

7.1p

Interim dividend Final dividend

7.5p8.2p 8.6p 9.0p

14.8p15.7p

16.8p17.9p 19.0p

21.9p23.2p

25.0p26.5p 28.0p

1 Pre-2009 amounts restated for impact of 2-for-5 Rights Issue in March 2009

ADRsCatlin’s American Depositary Receipts trade on the Over the Counter market (‘OTC’) under the following details:

Symbol: CNGRYCUSIP: 149188104ADR/common share ratio: 1:2US ISIN: US1491881041Underlying ISIN: BMG196F11004

Debt investorsParticulars of the preferred shares issued by the Catlin Group are as follows:

Issuer: Catlin Insurance Company Ltd.Securities: Non-Cumulative Perpetual Preferred SharesIssue date: 18 January 2007Redemption: Redemption on and after 19 January 2017 at the issuer’s optionNominal total: US$600 millionDividend rate: 7.249% per annum for the !rst ten yearsDividend dates: 19 January and 19 JulyRatings: BBB+ Standard & Poor’s; bbb A.M. Best

Annual General MeetingThe Annual General Meeting will be held at noon on Thursday 10 May 2012 at the Catlin Group of!ces at Washington House, 5th Floor, 16 Church Street, Hamilton, Bermuda HM 11. Shareholders are encouraged to attend the meeting.

Shareholder and investor enquiriesCatlin Investor Relations Department Tel: +44 (0)20 7458 5726E-mail: [email protected]

Share/depositary interest registration (Capita IRG)0871 664 0300 (UK)*+44 (0)20 8639 3399 (elsewhere)

* Calls cost 10 pence per minute plus network extras

Events calendarDate Event

16 March 2012 Payment of !nal 2011 dividend

10 May 2012 Annual General Meeting

11 May 2012 First-quarter 2012 Interim Management Statement

6 August 2012 Half-yearly !nancial results for period ending 30 June 2012

September 2012 Expected payment of interim 2012 dividend

12 November 2012 Third-quarter 2012 Interim Management Statement

Investor Relations continued


Glossary

Active underwriterThe individual at a Lloyd’s syndicate with principal authority to accept insurance and reinsurance risk on behalf of the syndicate.

Attritional loss ratioLoss ratio (see below) excluding catastrophe losses, large single-risk losses and reserve movements.

Binding authorityAn agreement with a coverholder under which an insurer delegates its authority, subject to certain limits, to enter into insurance contracts.

Catastrophe lossesSigni!cant losses incurred from natural catastrophes, including all such losses in excess of US$50 million (net of reinsurance).

Combined ratioThe sum of the loss ratio plus the expense ratio. A combined ratio of less than 100 per cent means an insurer has achieved an underwriting pro!t.

CoverholderA !rm that is authorised by an insurer/Lloyd’s syndicate to underwrite insurance or reinsurance contracts on its behalf.

Excess of lossA type of reinsurance that covers speci!ed losses incurred by the reassured in excess of a stated amount (the excess) up to a higher amount.

Expense ratioPolicy acquisition costs, most administrative expenses and other expenses divided by net premiums earned. Financing expenses, pro!t-related bonus, employee share option schemes and certain Group corporate costs are not included in the calculation.

Facultative riskA risk that is placed by means of a separately negotiated contract as opposed to one that is part of a larger programme or treaty.

Inception dateThe date on which an insurance or reinsurance contract comes into force.

Insurance carrierA regulated legal entity that assumes the risk of the policyholder in exchange for a premium and issues insurance/reinsurance policies and contracts. At Catlin, each of the underwriting hubs underwrites on behalf of one or more Group-owned insurance carriers.

Large single-risk lossesLosses arising from man-made causes that exceed expected severity for a given class of business, typically in excess of US$10 million (net of reinsurance) or recoverable under outwards catastrophe programmes.

Lead underwriterThe insurer or Lloyd’s syndicate responsible for setting the terms of an insurance or reinsurance contract that is subscribed by more than one insurer and/or syndicate. The lead underwriter generally has primary responsibility for managing any claims arising under such a contract.

Loss ratioLosses and less expenses divided by net premiums earned.

NameAn individual member of Lloyd’s.

Net underwriting contributionNet premiums earned less losses and loss expenses and policy acquisition costs.

PremiumsThe amount paid to an insurer for coverage. Written premiums refer to the entire premium paid by the assured. Earned premiums refer to the amount of premiums relating to expired portions of contracts underwritten; unearned premiums refer to premiums applicable to unexpired portions of policy periods. Gross premiums refer to the amount of premium underwritten before reinsurance costs; net premiums refer to the amount of premium minus premiums paid for reinsurance.

Proportional reinsuranceA type of reinsurance in which the reinsurer shares similar proportions of the premiums earned and the claims incurred as the reassured, plus certain associated expenses.

Quota shareA reinsurance treaty under which the reassured cedes a speci!ed percentage of all premiums received over a given period; in return, the reinsurer is obliged to pay the same percentage of any claims and speci!ed expenses arising on the reinsured account.

Single-risk lossA major loss occurring at one location (as opposed to catastrophe losses).

Underwriting hubOne of the six Catlin units that conduct underwriting operations on behalf of the Group. The underwriting hubs underwrite on behalf of one or more Catlin-owned insurance carriers.

US GAAPAccounting principles generally accepted in the United States of America. Catlin’s consolidated !nancial statements are prepared in accordance with US GAAP.

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Five-Year Financial Summary(US dollars in millions, except share amounts and as indicated)

2011 2010 2009 2008 2007

Operational information

Revenues

Gross premiums written $4,513 $4,069 $3,715 $3,437 $3,361

Reinsurance premiums ceded (678) (751) (547) (826) (787)

Net premiums earned 3,612 3,219 2,918 2,596 2,490

Net investment return 248 205 414 (91) 211

Change in fair value of catastrophe swaps/derivatives – (15) (31) (13) (30)

Net gains/(losses) on foreign currency 9 3 30 (21) (4)

Other income 4 2 4 15 23

Total revenues 3,873 3,414 3,335 2,486 2,690

Expenses

Losses and loss expenses 2,529 1,852 1,681 1,632 1,154

Policy acquisition costs 759 684 586 510 531

Administrative and other expenses 504 457 449 339 439

Financing costs 10 15 16 18 22

Total expenses 3,802 3,008 2,732 2,499 2,146

Net income/(loss) before income tax 71 406 603 (13) 544

Income tax bene!t/(expense) 11 (25) (50) 10 (60)

Net income/(loss) 82 381 553 (3) 484

Preferred stock dividends (44) (44) (44) (44) (22)

Net income/(loss) to common stockholders $38 $337 $509 $(47) $462

Basic earnings per share $0.11 $0.98 $1.52 $(0.16) $1.61

Diluted earnings per share $0.11 $0.93 $1.47 $(0.16) $1.52

Balance sheet information

Total cash and investments 8,388 8,021 7,693 $5,933 $6,001

Total assets 12,959 12,082 11,682 9,659 9,601

Unpaid losses and loss expenses 6,467 5,549 5,392 4,606 4,238

Unearned premiums 2,119 1,886 1,724 1,536 1,507

Total stockholders’ equity 3,298 3,448 3,278 2,469 3,017

Key statistics

Loss ratio 70.0% 57.5% 57.6% 62.9% 46.4%


Expense ratio 32.6% 32.3% 31.5% 32.0% 34.1%

Combined ratio 102.6% 89.8% 89.1% 94.9% 80.6%

Total investment return 3.1% 2.7% 5.9% (1.4%) 4.6%

Return on net tangible assets 1.7% 16.3% 33.2% (2.8%) 36.1%

Return on equity 1.3% 12.5% 24.3% (1.9%) 22.9%

Effective tax rate (15.6%) 6.3% 8.3% NM 11.0%

Book value per share (sterling) 5.06 5.41 4.74 4.53 4.21

Book value per share (US$) 7.85 8.34 7.68 6.61 8.38

Net tangible assets per share (sterling) 3.93 4.24 3.64 3.17 2.88

Net tangible assets per share (US$) 6.08 6.53 5.90 4.63 5.73

Dividends per share (UK pence) 28.0 26.5 25.0 23.2 21.9

Dividends per share (US cents) 44.9 42.5 40.0 37.9 43.9

Catlin on the web

Catlin.comCatlin Group Limited website

Catlin regional sites

Catlin.com/AsiaPacific Information about Catlin’s Asia-Paci!c underwriting hub

Catlin.com/AsiaPacific/AustraliaInformation about Catlin’s operations in Australia

Catlin.com/AsiaPacific/China Information about Catlin’s operations in China (available in English and Mandarin)

Catlin.com/BermudaInformation about Catlin Bermuda

Catlin.com/Canada Information about Catlin’s Canada underwriting hub (available in English and French)

Catlineurope.com Information about Catlin’s insurance underwriting operations in Europe (available in Dutch, English, French, German, Italian, Norwegian and Spanish)

Catlinreswitzerland.com Information about Catlin’s reinsurance underwriting operations in Europe

Catlin.com/UK Information about Catlin’s London/UK underwriting hub

Catlin.com/USInformation about Catlin US

Catlin.com/Latin-America-Caribbean Information about Catlin US’s reinsurance capabilities in Latin America and the Caribbean (available in English, Portuguese and Spanish)

Catlin broker/ product sites

Angelunderwriting.comInformation for UK brokers about Angel Underwriting

Catlinavailability.com Shows weekly schedules for Catlin’s London-based underwriters and claims managers

Catlincargo.com Online trading facility for brokers to quote and incept Cargo insurance for SME accounts

Catlinlife.com Online trading facility for brokers to quote Life and Accident & Health coverages

Fleetdirections.comCatlin’s Motor Fleet information centre

Other Catlin sites

Artcatlin.com Information about the Catlin Art Prize, The Catlin Guide and Catlin’s Fine Art underwriting

Catlinarcticsurvey.com Information about the 2009, 2010 and 2011 Catlin Arctic Surveys

Catlinseaviewsurvey.com Information about the upcoming Catlin Seaview Survey

To get more information, visit Catlin on the web


Catlin G

roup Limited A

nnual Report and A

ccounts 2011

Catlin Group Limited Washington House, 5th Floor16 Church StreetHamiltonBermuda HM 11+1 441 296 0060

Catlin .com

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