Catlin’s Interim Report Shows Gains, Despite Subprime Write Down

November 28, 2007

According to its recently released trading statement, the Bermuda-based Catlin Group Limited “continues to perform strongly, and this performance reflects continued broker support for Catlin’s enlarged underwriting operations.”

Gross premiums written for the nine-month period ended Sept. 30 were $2.73 billion, compared with $1.24 billion underwritten by Catlin on a stand-alone basis in the corresponding period of 2006 and a 6 per cent increase from the $2.58 billion written by Catlin and Wellington Underwriting plc combined during the first nine months of 2006 (on the basis that Wellington supplied 100 per cent of Lloyd’s Syndicate 2020’s capacity during 2006).”

Catlin said its “business retention continued to be strong during the third quarter,” while the “increase in gross premiums written was achieved at attractive pricing levels across Catlin’s book of business, even though weighted average premium rates across all classes of business decreased by 5 per cent during the nine-month period.” The report also indicated that the Group’s loss experience during the period had been “benign, primarily reflecting the relatively low incidence of catastrophe losses. Prior year reserves have developed in line with expectations.”

Catlin also noted that it had “recently completed a comprehensive review of all individual subprime-related securities in Catlin’s investment portfolio.” As a result it “expects to take a total charge during 2007 of $75 million against the value of these securities.” Catlin has sold some subprime-related securities at close to book value. It “now holds subprime-related securities with a book value of $85 million (prior to the charge), 85 per cent of which are collateralized debt obligations (‘CDOs’),” sad the bulletin. “The book value of the subprime-related portfolio after the sales and the charge is $12 million.”

The Group held total amount cash and investments of $5.85 billion as of Sept.30. The effect of the proposed $75 million charge would reduce the Group’s investment return to 3.6 per cent on an annualized basis as at 30 September 2007. Neither Standard & Poor’s nor A.M. Best indicated that the write down was cause for concern (see related article in “Ratings”).

The bulletin noted that “based on information currently available, the Group does not believe that its insurance and reinsurance portfolio is materially exposed to potential claims arising from subprime-related issues. Although the ultimate level and nature of these potential claims are not known to the market at this time, the Group had in the past largely withdrawn from business classes, such as financial institutions E&O and Fortune 500 D&O liability, that appear most likely to be affected.”

Chief Executive Stephen Catlin commented: “Catlin has made real progress during 2007, which is particularly pleasing given that the acquisition of Wellington was not yet complete at this time last year. The Group has benefited from strong business retention following the acquisition, attractive underwriting margins and a benign level of losses. Catlin has also enjoyed benefits from the increased scale created by the acquisition, and we continue to strengthen our underwriting teams and support functions to take advantage of new opportunities.

“The Group is on track to meet its targets in 2007. Whilst we have taken the decision to write down the value of the small portion of the investment portfolio exposed to the subprime sector, we expect the profit impact of the write down to be offset broadly by the low incidence of catastrophe losses in the second half of 2007.

“We currently expect that weighted average premium rates may decrease by as much as 10 per cent during 2008, although rate movements will vary considerably among the more than 30 classes of business that Catlin underwrites. However, we believe that rate adequacy will remain good across most of these business classes. We will benefit in 2008 from further embedded growth arising from the Wellington acquisition, as well as continued growth in the classes of business we already write from Catlin US and our network of international offices. Furthermore, we can expect to realize at least US$100 million in after-tax synergy savings arising from the acquisition. We look ahead to the remainder of 2007 and beyond with confidence.”

Source: Catlin –

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