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Executives

Stephen Catlin – CEO

Paul Brand – Group Chief Underwriting Officer

Benjamin Meuli – CFO

Analysts

William Hardcastle – Bank of America

Joanna Parsons – Westhouse

Nick Johnson – Numis

Andrew Ritchie – Autonomous

Maciej – Morgan Stanley

Ben Cohen – Canaccord

Andy Broadfield – Barclays

Catlin Group Ltd. (OTCPK:CLNGF) Q2 2014 Earnings Conference Call August 8, 2014 5:00 AM ET

Stephen Catlin

Good morning, ladies and gentlemen. Thank you for coming to our Half Year Analyst Presentation. And you probably don’t know this but next month, the company is 30 years old. And I’ve had the privilege of being CEO for that 30-year period, and it gives me particular delight to share these results with you today, largely because they come from the strategies that we build up overtime.

I think one of advantages of being in the post for a long period of a time is that you can take long-term views and you can actually think about strategy, and how you execute it. And that strategy has led to growth in earnings, in at what is – I think we’d all agree quite a challenging marketplace. As our global footprint matures, so the contribution to earnings increases, and this in time will lead to value differentiation. We benefit from strong relationships with brokers across the world that allows us to maintain share on business that we want to keep, we don’t get signed out, even in a competitive marketplace.

The market is under pressure, but is not universally in bad shape, and some of the commentary we have, particularly from insurance brokers, I think needs to be viewed with a degree of caution. One well known broker said, not for long ago, the reinsurance market is the worst in a generation. That is factually incorrect, although I will show you why that is the case later on. Another broking house were claiming reductions in price using their benchmark as the biggest reduction they got as they fight for benchmark, again, that isn’t the case, that is not the way to average reduction pricing. So beware of insurance brokers speaking out of their back pocket, that’s what they do.

So why the strategy? Back in 1999, Paul Brand and myself had a vision, which was that the London marketplace would be increasingly less relevant in mid-market business and that was outside of the U.K. It would retain its position as a leading reinsurance marketplace, and it would retain its position as the leading wholesale marketplace. I think by and large, that vision has come to fruition. When you have a vision, you don’t have to have a strategy, and then you have to execute against that strategy, and that’s what we’ve been doing for the last 10, 15 years. What have we got? What have we done? We’ve created choice for ourselves. We’ve created a plethora of distribution. We have increasing diversification, we have the ability for capital flexibility, we have a business that works in all parts of the cycle of the marketplace, and it allows us to be both, local and global.

The result is $536 million in net underwriting contribution, up 21%. Notably 48% comes from our lone London hubs, up from 43% last half year. The combined loss ratio is down from 88% to 85%, and that has led to 118% increase in profit before tax at $318 million. And we’ve had a minimum foreign exchange impact of $3 million, and Benji will talk about that later on. And that has led to a return [ph] of 21.3%. The investor return was 1.6%, $148 million, I would urge you not to double that for the year end as much I would like that to happen, it isn’t going to happen in the three weeks and something very bizarre happens in the marketplaces. The gross premium written is up 11% but there is some background noise there and the underlying increase is 5%, and that leads to a forecast for the full year of approximately $5.7 billion GPW.

Pleasantly there is 27% growth in U.S. dollar, net tangible assets plus dividends during the last twelve months, and the Board this week agreed to a 5% increase in the interim dividend to 10.5 pence per share. This just shows you practically that we have had a record first half underwriting contribution, and indeed profit before tax.

On this slide, I’d like to point two things out here. Firstly, that the mix of business risen is about the same from last half year, i.e. 55% non-London, 45% London. But encouragingly, the underwriting contribution from non-London has gone up from 43% to 48%. The attritional loss ratio remains low, unless which is just through disciplined underwriting. I’ve been asked a question, do you expect that to go up in the following marketplace, and the answer of that has to be yes, but there is a lag. And I would point out that the attritional loss ratio by and large comes from the direct account and the proportional for insurance account, and in these markets our rate fall is much less than the capital market. So once you would get out we’re expecting a creep, not a jump.

As I said before, the global footprint gets its distribution, gets it ability to be local and global, and as importantly, likes to take advantage of pricing differences. And as you can see and as you probably would expect, the biggest falls in price are in London and Bermuda, and that’s where we write the bulk of our cat exposure. But if you look international, in the U.S., you can see that the fall is much less and indeed, in the U.S. we’ve had a price increase.

On this slide, I’d like to draw your attention to – first is the reinsurance account where you can see that half of our reinsurance is now written in U.S. and international with a price fold is significantly less than that what you see in Bermuda and London, to be expected. And then if you look from a left hand side, at our insurance portfolio, the bulk of which still is written in London, the price fold there is 2.6% which is by no means for disaster.

Since 2009, we’ve worked very hard with our reinsurance account to create balance within the portfolio. We have no large concentration of exposure, we diversify the account over the years, we have a spread of geography, and indeed of class. And you can see on the top right hand side, that the percentage of U.S. property cat business has decreased against the whole – and indeed the non-U.S. casualty – the property cat has increased. Interestingly, between 2009 and 2014 we’ve been writing broadly the same amount of U.S. property cat, just over $400 per annum. In 2009 that represented 11.7% of our total revenue, today it only represents 7.4% of our total revenue. And the U.S. property cat is 25% of the total reinsurance account. So when people say that we write 40% property cat exposed business that is untrue, the facts are before you.

I’m very pleased to say that we’ve had an increasing dividend, and as you can see we had a progressive dividend policy over the years ever since we went public in 2004, and do have intention to continue this. So with that furthered, I’m going to hand over to Brand who can talk you in greater detail about the underwriting. Thank you, Paul.

Paul Brand

Thank you, Stephen. As Stephen just said, another half year showing record underwriting contributions driven by a combination of a growing portfolio and improved attritional loss ratio, and reduced cat losses. Across the portfolio race reduced by modest 3.2%, and in my view, margins are still good in many classes.

Moving onto the analysis of the loss ratios, overall a 4% reduction in the loss ratio when compared to 2013 with better attritional and cat loss ratios, reserve release is at similar level, and large single-risk losses increased but still low. More surprisingly, given the turbo loss of life, and political implications of MH17, and the events in Libya, there has been a lot of speculation in the media about the impact on insurers. Mostly we are leading aviation insurer and also have some reinsurance exposure to these events. In the aggregate, our early estimates of net losses across the two events is less than $50 million, which when taken with the low level of large single-risk and cat losses in the first half means that so far 2014 continues to be a better than average year.

Headline growth of 11% but underlying growth more sustainable in this market, 5%. The hubs were the biggest adjustments between headline and underlying growth of U.K. and Bermuda, with both have substantial reinsurance books, an increased proportion of which has been booked as multi-year contracts. The underlying growth for London is roughly 2%, and for Bermuda, minus 10%. Conversely, the underlying growth rate in the U.S. is stronger than that headline. During 2013, we stopped writing marine insurance business from our U.S. hub. Adjusting for this we showed a growth rate similar to our other international operations as around 15%.

So since 2009 volumes from the U.S. and our international hubs combined will have shown a combined annual growth rate of around 20%. And as Stephen showed, the rate decrease is higher in London and Bermuda than in those hubs. So I would expect that trend of higher growth outside of London, in the U.S. and some of the international hubs to continue. And here you see our rate index which shows the different catastrophe pricing experience this year. As Stephen commented, our catastrophe price reduction is more muted than some have commented on, partly because the index includes both reinsurance and insurance classes, but also because I believe our risk selection drives a better than average portfolio. It should also be noted that as demonstrated in 2011, we also purchased a fairly significant amount of retrocession, and pricing for retro has fallen faster than was the pricing for last two major renewals.

Looking across the right movements by product group, we generally see weaker prices than we saw in 2013 but I would expect airline prices to increase towards the end of this year. And here is somewhat detail on the catastrophe portfolio which has experienced the most challenging pricing during 2014.

Looking at the hubs, you can see the underwriting contribution has increased in all hubs when compared to last year, with the largest dollar improvement of $34 million coming from the international hub. Also, and perhaps more importantly, other than the U.S. which includes a $7 million tornado loss in its attrition, the attritional loss ratio has either improved or be maintained across the Board. These numbers underpin the strength of the underwriting across the capital portfolio. A similarly strong set of numbers remain examined in [ph] Catlin from a product point of view with an increased underwriting contribution across all product groups other than aviation which was impacted by MH370 loss in the first half by $11 million, but also by the difficult trading conditions.

The largest dollar increase in underwriting contribution came from the reinsurance product group of $94 million, and also the underwriting contribution from the property group more than doubled to $100 million.

Looking ahead, it seems likely that with exception of the few bright spots, we should expect to see the continued pressure on pricing and generally in an environment where headwinds are stronger than tailwinds. But it should be remembered that underwriting skill, reputation strategy and execution can go a long way to mitigating these headwinds. Our recent results of successive record underwriting contribution demonstrate this.

And I will now hand over to Benji.

Benjamin Meuli

Thank you, Paul. Good morning, everybody. Well I hope as you can tell – actually sometimes it’s bit difficult with Brand. We are already very pleased to be presenting such a healthy set of results today.

Benign loss expenses clearly helped, but we have to agree that this begins to show really tangible evidence of differentiation. For some years actually we’ve been telling you that our strategy is designed to perform well, in both soft markets, as well as hard markets. And what you see in these results bears that out. As Stephen has already said, what matters in a softer market is the ability to hang on to good business, and we have that ability.

Turning to the numbers, I’m going to begin as usual, with the U.S. GAAP income statement. Stephen has already mentioned the increase in profit before tax, a 118% increase to $318 million, and slightly larger increase, a 129% to $273 million for net income to common stockholders. Just to note, our tax rate for the period was 7.8%, and that is there for now normalizing towards the 10% long run average we expect, although clearly, the number can always be higher or lower depending on where our losses fall in the given year. That said, tax paid this year will be considerably higher in 2014 as some of our deferred tax liability start to become due.

I’m going to turn now to the components of profit before tax. Paul has already mentioned and described the record underwriting contribution. On the second line though, down, and as a matter of fact, the investment returns in this first half is the second highest ever, albeit from a much larger portfolio, and we’ll talk some more about that later.

As far as the expenses are concerned, we’ve re-characterized the way we disclose expenses, in a way we hope you’ll find helpful. There are now three components to this. The first is the expenses related to underwriting which are those that we include in the ratio. The second element, performance related compensation is exactly what it says it is, and that will fluctuate up and down with the fortunes of shareholders. Now it won’t always happen like this but you can see that the increase from $41 million in the first half of last year to $90 million in the first half of this year is a 119% which is broadly equivalent to the increase we’ve seen in pretax profits. The final element is just labeled other, and that contains the expenses that are not included in the ratio, for example, the cost of the investment function, and various regulatory costs. And for the first time in this half year, we’re also including approximately $4 million of exceptional restructuring costs associated with the reorganization and set up costs attaching to our shared services initiative. We expect a similar charge actually in the second half of the year.

Looking now on slide 28, at the ratios, Stephen and Paul, both already said gross premiums written and net premiums earned growth has been somewhat overstated, largely as a result of the writing of multi-year contract in the first half of the year. The underlying GPW growth closer to 5%, net premiums earned closer to 3%, at a headline level, our outlook for the full year has GPW growth of around 7.5%, and we expect net premiums earned to be a shade under 4%, as we don’t expect those factors to reappear in the second half. I’m therefore going to repeat our earlier guidance that net premium earned growth will lag GPW growth by between 3% and 4% though it may well be towards the upper end of that range as we haven’t previously anticipated the growth in multi-year contracts that we’ve actually seen.

Looking down the list of ratios, Stephen has mentioned the 85% combined ratio, and based the way we calculated, on a fully loaded basis is actually 91.7%, just how we calculated.

Turning now to the next slide, you’ll have noticed that the headline expense ratio is up, shade under 1%, but that’s pretty much entirely accounted for by an increase in the brokerage ratio. And as noted bottom explains, this is due to an accounting change. We previously been netting some acquisition costs against premiums and then I’ll correctly classify this acquisitions expenses. So that has no impact on profits whatsoever is the corresponding change in premiums. The admin expense ratio, the blue bar to the right hand side, is broadly flat, which is an achievement we’re quite proud off given our significant program of ongoing investment in systems and infrastructure. We’ve also removed the distinction between controllable and non-controllable which we didn’t consider to be particularly helpful.

Looking ahead, we continue to expect the administrative expense ratio to decline slowly from next year onwards, that is, of course, assuming no further significant changes in foreign exchange rates or our market conditions.

The balance sheet as shown on slide 30, and that’s pretty clean really. I think the most notable feature is the growth of 13% from just under $3.5 billion to just under $4 billion in total stockholders’ equity over the past twelve months.

The next chart, slide 31, shows you – as usual the waterfall for the growth in shareholders’ equity since the full year, and it’s pretty much I think as you would expect though maybe worst pointing out, that foreign exchange effects, i.e. translational effects, passing through other comprehensive income are also fairly muted. I’m sorry I forgot to mention on the earlier slide where I was talking about the results that as Stephen mentioned that we have really very little in the way of foreign exchange impact going through these results this year. And I think that’s the result of having spent lot of time and efforts studying our foreign exchange exposures and making sure that we can indeed manage them for the benefit of our shareholders.

Back to shareholders equity, as will know we don’t provide an update on our capital position at the half year. It was strong, the full year, we said as much – it remains strong now and we will provide a further update at the full year once we see what the second half may bring and when we’ve completed our assessment of the year ahead as part of the business plan.

Again, we’ve had a modest release from reserves, broadly comparable to back from last year. You should note that this does include some strengthening for both, the Darfield, New Zealand earthquake, as well as for Costa Concordia, and these are both offset – more than offset by releases elsewhere. So interestingly, the overall release is spread fairly evenly actually across all our hubs and all our product groups. So looking at the past twelve months from a shareholders perspective, the growth in tangible assets plus share plus dividends received has produced what we think is pretty impressive growth of 27% in U.S. dollar terms, and 13% in sterling terms.

Now I’m going to conclude with a few words on investments. We’re actually pretty pleased with 1.6% U.S. GAAP return for the period, especially, since it also represents a nice return on an economical or [indiscernible] basis. The fixed income portfolios performed well as rates have declined and credit spreads have tightened, and I think also worthy of note is the strong return from other invested assets, including our special situations in private equity portfolios. Allocation to these funds is somewhat lower than it was in December or March, as the team is continuing to show commendable discipline in exiting positions that have reached on target levels. We still retain the ambition to grow these portfolios further, and will most likely do so if a market correction gives us the opportunity.

Following slide shows the components of the investment return divided into investment income and net gains on both, fixed income and other assets. And then the next slide tells you a little bit about what we actually did with the portfolio during the first half. Perhaps worth noting that we did actively manage our duration the period, that it’s one of the hard to tell that from the disclosure as situation was virtually the same in June as it have been in December, nevertheless, we did in fact increase quite a bit in the meantime which obviously helped us as rates declined.

Looking forward, as Stephen said, we don’t necessarily expect to repeat the first half performance in the second half of the year. We actually believe rates are more likely to rise in the second half than they were in the first half, and that explains why we brought duration back down again. If rates do begin to rise, it will clearly pose headwinds for our U.S. GAAP return in the second half of the year, that would actually benefit our economic or solvency two numbers. As economic fundamentals continue to improve, as we believe they will, this should help the long-term performance of our private equity and private credit positions, although we expect continuing volatility in shorter mark-to-market – shorter term mark-to-market returns.

So looking forward, the best scenario for us, from both a U.S. GAAP and an economic perspective, is actually where our rights move sideways or drift gently upwards and while risk assets continue to do well, we shall see. Thank you very much.

And I’ll now hand it over to Stephan for some conclusion remarks.

Stephen Catlin

Thanks, Benji. As I said at the beginning, we’ve had a consistent strategy to Catlin, this has led to continued profitable growth in our non-London hubs, net under running contribution from them increased by 37% this half year. These homes have now produced $679 million in underwriting contribution over the past five years and we expect that to grow in the future.

We do have a strong and flexible capital position, we have significant third-party capital structures in place, not just for the syndicate but also for the insurance companies as well, both are broadly speaking in same terms and conditions. And we continue to build a business through the future. So why has this strategy delivered rewards?

Firstly, we’ve had disciplined underwriting. Secondly, we have a very strong control environment. Our back office is full of strength and depth globally. We’ve got high quality underwriting teams around the world, and we also have as importantly high quality claims teams, third-party accreditation has come from – yet again, the Gracechurch report, where we’ve come out top in London for the last five years, as another example of third-party accreditation. In America, the American Council of Engineering Companies have put us as the top U.S. construction claims team for the third time.

Profit is a driver for us, not market share. And this will lead to a lower attritional loss ratio, and an increased underwriting contribution. But there is something else, and that is our values, teamwork, transparency, accountability, integrity, dignity; these are words that we are using now for good ten years internally, and whenever I do a town hall, I talk about our values every single time. What we’ve learned recently, and I wish we had learnt it sooner, is actually talking about our values externally has a benefit because people like to do business with people that have values, who are consistent, who are fair, who are trustworthy. This is now truly a diverse global business which is trusted and respected by many people.

Thank you for listening. We’re very happy to take questions now. Please put your hand up, and before you ask the question could you please state your name and the company for whom you work. Thank you very much indeed.

Question-and-Answer Session

William Hardcastle – Bank of America

Hi, there. William Hardcastle, Bank of America. If I look at slide 10 which was price declines by hub and seeing of the underlying London growth of 5%, the Bermuda I’m not sure whether you gave us an underlying growth. If I assume flat, the volume growth implied by that is something around 10% in London, and probably a positive number in Bermuda. Am I missing something there or what’s driving the growth, is it the non-price declining business?

Paul Brand

I think you start to misheard me, I said 2% underlying growth in London, so that would change your assumption there, minus 10% Bermuda, so that would change the assumptions there.

William Hardcastle – Bank of America

What’s the missing part on that? Is that Bermuda price is down 6%, your premium was pretty flat in Bermuda.

Paul Brand

Yes, so premium – in terms of the difference between the underlying and the headline growth…

William Hardcastle – Bank of America

Is it a multi-year?

Paul Brand

Exactly.

William Hardcastle – Bank of America

Right, I’m with you now.

Paul Brand

Perfect.

Unidentified Analyst

Anthony Dcosta [ph] from Peel Hunt. And so my first question is, have we seen the end of losses emanating from Catlin’s exposure to Costa Concordia? And then the next question is on Solvency too, would the current portfolio meet Solvency II criteria and the changes that you’re going to put in the investment portfolio?

Stephen Catlin

Okay, your first question, I think you will know Costa Concordia is now being docked; it is now no longer by the shipping company. So we are off-risk for that. The residual exposure that we have is the demand by the Italian Government to remove the cradles that we used to turn the vessel upright. And we estimate that will probably be up to $50 million, 100% extra loss to the marketplace, which is as Benji said, in our reserve already. On Solvency II, Benji?

Benjamin Meuli

On Solvency II, I think the best way to answer that question, for the last five years really we’ve been managing the investment portfolio using a framework which we’ve described here and at Investor Days that is pretty much identical to the Solvency II framework, so that’s how we manage the portfolio. So I have no hesitation at all and Solvency II isn’t in force yet but when it does come into force in 2016 it won’t held any change in the way we do things.

Unidentified Analyst

Thank you.

Stephen Catlin

Joanna?

Joanna Parsons – Westhouse

Thank you. I’m Joanna Parsons from Westhouse. I just wanted to follow-up, you’ve commented in the last couple of results meeting about your investment in the business and the impact on the expense ratio and obviously, so those movements in the fixed stake. Could you give us a bit of color looking forward into the second half of this year how you see expense ratio developing into next year because it looks like you’re perhaps a little bit further ahead than you hope to or is it just that you’ve had that impact with the multi-year policies of driving up the premium, and therefore the ratio hasn’t been effect [ph].

Stephen Catlin

Well just to dispel that, first of all, I mean the multi-year policies contribute nothing to net premiums earned, other than the earnings for this part of the period, so the MP hasn’t distorted in that way. But in terms of the expenses, yes, I think we have done a little better than we thought we might when we spoke to you earlier. I wouldn’t expect great changes in the expense ratio for the second half of the year but I would expect to hold it flat, I mean with currency movements notwithstanding and maybe to start to see a drift down, again, just a little bit in the beginning of 2015. We have always said that the period of investment – there is a sort of front load to that, so that would be experiencing on peak really, probably this year, the investments are expected to be somewhat lower in the course of next year and we’ll start to see the ratio improve, I think significantly from in years three four and five.

To give some color to that in terms of what’s going on, there are two things really. One is shared services, and we have shared service in Scottsdale, we call them – and that’s been there for sometime, and we opened Rocks Live [ph] in Poland a year ago. I actually went out to see that office only a few weeks ago and I was stunned actually by the atmosphere in the office, it felt like a Catlin office, the quality of the people, to give you some idea of where we’re going, the cost per head in Rocks Live is something like $24,500 which is substantially cheaper than it would be in Europe or America, but with high quality people who are absolutely dedicated to what they do. The shared services is going to build-out over about three or four year period, and the savings are beginning to come through now and they will increasingly come through in the next sort of three to four year period.

The other thing that we’re doing like many other people is actually investing in processing systems, the big one we’ve got going at the moment is in America. Again I went out to see – we call it Project Phoenix, I went out to see those people a few weeks ago as well, it’s a highly complex project, it’s got 179 people working on it full time, it’s costing $25 million a year as it got out. The first roll out was going to be at the end of February of next year, and again over a five year period we will reap benefits from that. So the expectation as Benji has said is actually 2014 will be the peak of expense ratio, and that it will come down a little bit year-on-year for these five years.

Unidentified Analyst

Good morning, I’m Sarah [ph], I’ve got two questions. Firstly, looking at slide 21, we can see that cat rates are obviously falling an increasing rate but you say that rates are still adequate. How much lower can they go before they’ve been there longer adequate? And secondly, if market dynamics do stay the same, R&D worse, how much do you envisage pulling back for the say in Bermuda, and so how big will the proportion be from international U.S. business?

Stephen Catlin

If you look at slide 19, which shows you the indices of cat, the red line there. You can see that while safe come off a bit, compared to what they were in 1999, they are monumental. So we are quite a long way for saying to you there is no margin in cat exposures, there are still margin there. What is that she happening is as you know, we’ve got alternative capital coming to the marketplace, and we’ve had in terms of capital committed marketplace for years in different shapes and thoughts. I had dinner last night with CEO of Swiss Re [ph]. When we were talking about it there to pursue this together and there is no doubt that most people are taking benefit, as indeed we do, of the alternative markets to buy out with protection, nobody wants to do it all out bay because this is still a relationship business. And when you’re talking about being a reinsurance carrier, the strength of your relationship with your client counts, and the people who have the strong relationship keep the business and keep the signings.

I’ll give you an example of that. In Japan, and this is done to the work of the reinsurance team and in the Paul Brand, hosted – Paul Brand was out there within four weeks. And we were supported although our Japanese colleagues [ph]. The output of that has been – and when we come through the new season this year, unlike many who lost market share big time, we actually slightly increased our yen exposure, and that was predicated on how we behave historically and our relationship. Now, it is true that alternative capital is a downward force on reinsurance business, but it’s very clear that those reinsurance carriers are doing okay although ones that have good relationships, and we think that will continue. Second question, I forgot that.

Unidentified Analyst

It’s about the proportion of international newest business growing and in comparison with Bermuda and London –

Stephen Catlin

Paul Brand?

Paul Brand

Yes, as I said I think there is a clear line of sight for growth in the international off season that is in London and Bermuda at the moment. Yes, I would absolutely agree with that.

Stephen Catlin

Next question? We’ll get to you, I promise.

Nick Johnson – Numis

Good morning. Nick Johnson from Numis. Another question on the reinsurance accounts, just to follow-on really, given where the current pricing is, do you envisage further growth in reinsurance income next year? And then relating to that on capital, I know you didn’t disclose the position in the first half but can you just give us a feel for what the growth in reinsurance income volume is doing to the capital requirement? Thanks.

Stephen Catlin

Can I turn you to slide 12, again, if I may, and let’s talk a little bit more about reinsurance. Many people seem to think that when you say the word reinsurance you mean property cat exposure, that is part of most people’s reinsurance portfolio. But as you can see, if you look at the bottom of the pie chart, we have a significant mix of business, some of which is not cat exposed at all, some of which is de minimus cat exposed. And that’s why when you look at pricing on the preceding page, page 11, you see that the pricing pressure on reinsurance is coming from property cat, but the pricing pressure outside of that is much, much less significant, you can see in U.S. and international, the reinsurance pricing is down 1% to 1.7%. So we will certainly hope to grow the reinsurance account in the future on a balanced basis. Would we anticipate increasing the property cat element to that in the short-to-medium term, and I think the answer to that is probably not, but we write it depends what margins we think is there. But that reinsurance portfolio has plethora types of risk in it. And the normal suffering the same pricing pressures has property cats. The second question I need to be reminded off.

Nick Johnson – Numis

(Inaudible)

Paul Brand

Let me presume it that the portfolio as a whole remains broadly by discount mix than capital from ARMS grow roughly in line with the business. Does this note – in other words, we are not changing the risk of mix of the firm if we grow the reinsurance business in proportion with rest of it as it is today. If the proportion change materially then things do start to change, but we’re not expecting in other words, any major effect from that.

Stephen Catlin

Our capital cost for the reinsurance would be quite a lot lower than many people because there is so much more diversified portfolio. It’s a diversification of the profile and that reduces the capital requirement. Yes?

Andrew Ritchie – Autonomous

I’m Andrew Ritchie from Autonomous, four short questions. First of all, just on the outlook for the attritional and expense ratio. This two mix effects going on in your portfolio but one is slightly longer tail from a casualty and secondly more proportional. What fact do you to anticipate that will have on the attritional loss and on the expense ratio? Secondly, on your cat aggregate PMLs, I’m just quite lost the movement up and down. Things like Florida and Gulf of Mexico I think – can Japan have gone through. What’s going on their method, you poured net-net more protection, may be just – I think you mentioned to the tide to some model changes there as well. Thirdly, third party see, I think you’ve said were 25 million in the first half of the year. I’m not quite sure where I see that or may tell us also what trajectory is for that for the second half, quite help to model. And finally on the investment special situations further, just to remind us again how you mark to market the special six, or is all of that not – is actually realized gains not mark to market? And if you increase it to $1 billion by the end of the year, does that have quite a big economic capital charge against it? Thanks.

Stephen Catlin

Okay, Brand, why don’t you do the first two, so the attritional loss rates and the cat aggregates.

Paul Brand

Sure. I mean, as Stephen said, we might expect the attritional loss ratio to rise gradually. As cut out of proportions, I’m grow, and maybe short-tail or cat shrinks that would have – that would modestly have that effect because I’ve said it in previous presentations, part of my job is to try and actually minimize that attritional loss ratio. And we can do several things to help that, one is, some of it is around business retention, some of it is around portfolio balance, but a lot of it is around pricing and actually building sort of clearer insights on reselection and how we price the business. And we’re investing quite a lot in that. I would expect that to have an opposite effect on the attritional loss ratio overtime. So, where that will lead us – as Stephen said, some modest increase as we think out over several years.

And on the cat side, essentially we’re showing you the cat aggregates that one-fold, the largest effect sort of – compounding of these changes particularly to Florida, and Gulf of Mexico, it’s just sort of a chance renewal date for some – one of the protections which protected Florida, which essentially wasn’t in force at one-fold but we have subsequently at – 1.6% or 1.7%, both some additional cover, so that sort of normalizes a bit. The additional cover was $40 million, the ILW which rolled off was sort of – say for a $100 million, so not exactly matched but I think there is a – so you have to look at how these things sort of develop overtime, and perhaps we might want to consider giving some forward guidance on that at some point.

Unidentified Analyst

(Inaudible).

Paul Brand

No, we’ve not significantly taken a greater cat exposures.

Unidentified Analyst

(Inaudible).

Stephen Catlin

Okay, third-party fees – I apologize, it isn’t easy to model, I’m not really sure how much I can help you. As we’ve said before, I mean there are – the way these contracts work is that, outwards close a share reinsurance contract, so we take the business in and we seed it out to these vehicles. And the way we’re remunerated is two-fold. Number one, there is an expense over rider which is a function of gross premiums written, and assuming that that over rider, if that matched our expense ratio then receiving that back that’s credited to expense would have the effect of not really changing the expense ratio at all, which is what it’s designed to do. The other component of the fees is profit commission, which is obviously much more variable depending on whether or not the business that we have seeded turns out ultimately to be profitable or not. But broadly speaking, we would expect a similar number to accrue to us during the second half of the year.

Unidentified Analyst

So, a portion is in the expense ratio?

Stephen Catlin

A portion is in the expense ratio, exactly.

Unidentified Analyst

As you go into 2015, 2016, 2017; so that will increase provided we have consistent profitability because the actual amount of third-party capital we’ve utilized has increased, and there is a lag factor on the profit commission?

Stephen Catlin

And then the final question was on the special SITs portfolio, and – well it’s really – one of the vast majority but probably, three quarters of the portfolio is actually enlisted securities, so there is a readily available and transparent market price and we follow the usual accounting rules in terms of level 1, level 2, level 3 and the rest of that. And for the vast majority of our private equity positions, we are co-investing alongside private equity partners, so we will take their mark on that position when it comes to the end of the year or whenever they actually update their valuation. If we were to increase that portfolio, and I think I actually referred to that increase in the context of other – increase the special SITs portfolio to $1 billion, it would bring an increased capital charge, not doubt it, but again with that part of our modeling has taken into account on capital planning and we certainly believe that we have the capital to support that otherwise we wouldn’t be proposing it. I just like to say also, I mean just thought as well, when we look at our returns on all these investments, we look at them on a fully economic risk capital adjusted basis. So that’s how when they –

Unidentified Analyst

How much good time is actually realized?

Stephen Catlin

On the special SITs portfolio?

Unidentified Analyst

$71 million was the total return?

Stephen Catlin

Roughly half, thank you, Martyn. Next question.

Maciej – Morgan Stanley

Hi, it’s Maciej from Morgan Stanley. Two questions, if I may. The first question is, just looking at the performance related pay, I mean if I just look at it, it looks like it’s doubled what it was last year and your profits were doubled what they were last year. I mean is it simply related to the profit before tax or do you make some adjustments for investment income or anything in there? And also, do you have any kind of call back provisions or anything in terms of longer related pay in terms of that. The second question is on insuring the box [ph]. Have you guys made any – done any action there, I mean you haven’t explicitly said so, it might have been part of special SITs, but if you haven’t done anything, a couple of the competitors have been sure that the box have been sold for very multiples recently, just your update on strategic thinking around that business now.

Stephen Catlin

That point is not for – and I would leave it to that. On your first question, let me talk about the pay structure we have, I think I’ll put the best way of dealing. And we have changed it for this year, a little bit. Middle management in this company, get base pay, profit commission bonus, and stock, as a three components to their pay. And we try and make certain that all of us, including me, are completely aligned with shareholder interest. The stock is based on performance of the company and is paid out half after three years and half after four years, taking the average of the three and the average of the four. So there is a built into that, therefore accrual back. And for the record, we’ve been in that position since 2004, so we’re way ahead of the marketplace and actually making that alignment of interest. In terms of actual accounting of it, I’m going to handover to –

Paul Brand

Much appreciated, it’s actually quite complicated and that’s why I sort of said when I went through it that it won’t always happen this way but broadly speaking the component of variable pay that is most closely linked to profit before tax is – what Stephan said was profit commission or what we talk about is the annual bonus. The accounting for the longer term stock option awards is more complex and it depends on the growth in book value per share over that Stephen said, either a three or four year period. So as that calculation changes, it can be either a catch-up or a release, depending on whether they are doing better or worse than the original assumptions we’d made the challenge based on.

Maciej – Morgan Stanley

But both of those come through in the profit – in the line $90 million from the 1H that includes this –

Paul Brand

Yes, exactly, both precisely, one of the three elements in fact.

Ben Cohen – Canaccord

Hi, it’s Ben Cohen – excuse me, e, Ben Cohen at Canaccord. Two things please, firstly, could you say something about terms and conditions in the markets that you work in, are there any sort of red lines that are coming up that you would not be prepared to cross that others in the market are in terms of terms and conditions? And also on the proportional reinsurance business, could you make a comment about seeding commissions, I think Munich Re yesterday was saying that, that same continued upward pressure in terms of those costs for reinsurance providers. Could you just see – talk about the impact on your economics? Thank you.

Stephen Catlin

Brand?

Paul Brand

Seeding commissions first, yes, as you can sort of see we’ve noted a reduction across the piece in reinsurance but includes some improvements in preceding commission, so we would measure that as part of our overall right movement. In terms of terms and conditions, we are definitely seeing some pushing. I think one of the areas of biggest concerns for us might be around cyber [ph], and I think there is some attempts to broaden the amount of cyber that is given by a variety of the marketplaces and we are resisting that.

Ben Cohen – Canaccord

Sorry, can I just follow-up. I’m not sure I got what you were saying on seeding commissions. I was thinking about the business that you’re writing, is not hurting the economics of what you’re writing rather than the business you’re seeding?

Paul Brand

Yes, if we do that bigger seeding commission that we gave the previous year we would not feed as a reduced expectation profit, we would not feed as a great reduction.

Andy Broadfield – Barclays

Hi, it’s Andy Broadfield from Barclays. And, two questions please. One, you mentioned little bit about the benefits of the model, Catlin’s development in the model. I was wondering if there is only datapoints on retention, whether that’s changed at all or whether it actually maintaining has been impressive in this market, so retention of business. The second is a little bit more about the multi-year contracts, typically that I think signals soft cycle or soft market, and it feels to me only a year or so into the cycle, so it doesn’t feel like it’s a soft market, just softening one, and I think that’s the comments that you’ve made so far. Why do you think those multi-years have been coming in, is this just normal business or is this some sort of sign of perhaps prices being a little bit softer than we thought?

Stephen Catlin

I’ll just do the last point first, I mean, multi-contracts do tend to come in in a falling market, that’s been the case for all the time I’ve worked in the industry. Further, yes, there is a correlation there, definitely. In terms of sort of measuring how we’re doing in retention, we look at our – what we call our broker signings, so when you write a line, so you write 10% line, you make it sound onto 80% and 70%, whatever it is, that’s called the signing. And we measure how our written lines compare to our signed lines per broker. And we take particular interest while surprising in the bigger brokers. And what has been very gratifying to us is that we have a remarkably constant timing to brokers. I think part of it is bad to relationship, and it’s about what you deliver. We lead a significant part of the portfolio we write to the large brokers, and your ability to keep your signed line is stronger if we’re a leader than if we’re a follower. And there is becoming sort of – a bit of a have and have not here, there is a certain number of carriers that are maintaining signings quite well, we’re certainly one of those and we’ve done frankly every business well as we could have hoped to think. And there are other people who maybe – they value propositions not quite so clear, are being signed down dramatically, where even we left off the business. Any other questions. Yes?

Unidentified Analyst

(Inaudible)

Stephen Catlin

I think I’ve answered the question. We’ve noted. You can derive from that answer whatever you wish. But if there are no further questions, thank you very much for attending. Thank you for your questions, very gratefully received. And enjoy the rest of the day. Thank you.

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