Catlin's acquisition of Wellington was one of the biggest deals of 2006 and with healthy profits expected, 2007 is shaping up to be an exciting year for the company. Liz Booth finds out more.

Catlin broke the habit of a lifetime last year by acquiring Wellington in December 2006, previously preferring to grow organically rather than through acquisition. But the natural fit between the two companies convinced everyone that it would be a good move.

Founder, chairman and CEO of Catlin Group, Stephen Catlin often jokes about the launch of the business as an underwriting agency, borrowing the photocopier from the guys next door while also aiming to ensure a high quality of service. Paul Jardine, CEO of Catlin Syndicate 2003 and chief operating officer of the Catlin Group, insists that those original aims of maintaining high standards remain today. "This business is all about people. You have to have the highest standards in terms of underwriting flair and technical skills and the highest standards in terms of people."

Even in the five years since Jardine joined the firm there has been massive change. Although the Wellington acquisition will massively boost the firm, it will not be the first time Catlin has grown as explosively. He says that when he first joined the company, Catlin had some 90 employees writing about $350m annually. Today the staff numbers have risen to around 1,000 worldwide and the financial numbers are up by a factor of ten. But despite the growth, Jardine is confident the company remains true to its roots with all the attributes of a solid family business. "We are not about bolting other businesses on but about organic growth," he insists.

Even with 1,000 staff on its books, Catlin is a relatively small operation and Jardine says short communication lines help to keep employees focused. The Wellington takeover has worked, he says, because the fit was so good, giving the firm a larger presence at Lloyd's and a solid US base. The acquisition has created a major international specialty property and casualty re/insurer with gross premiums of approximately $2.4bn and a pro forma market capitalisation of approximately £1.3bn. It also increases the group's total net asset value by 76% to $1.9bn.

Immersing the Wellington staff into the Catlin culture was crucial, he says, and within hours of the deal being agreed, the two teams were working side by side. This has ensured a smooth transition, not least by giving all the staff confidence about the future. The firm has always placed itself in a good position to take advantage of strong markets to push ahead with growth. Both in the wake of Hurricane Andrew and 9/11 it was able to gain market share - and now again in the wake of the 2005 hurricane season.

There were some challenges in 2006. When AM Best placed the Catlin's "A" financial strength rating under review with negative implications in October 2006, before the Wellington deal had been announced, it came as a major shock. AM Best said the decision had been made due to concerns relating to the level of Catlin's consolidated catastrophe exposure and the likely future impact of major events on risk-adjusted capitalisation. Stephen Catlin promptly expressed his dismay, saying: "We are puzzled by AM Best's decision ... especially in the light of our performance and achievements during 2006. We will concentrate our efforts to engage in constructive communication ... to alleviate any concerns Best may have regarding Catlin's catastrophe exposures." Even news that Catlin's offer for Wellington had been declared unconditional was insufficient to shake this negative watch, although the rating agency acknowledged, "Enhanced diversification that may result from the proposed acquisition could have a positive impact".

Worldwide presence

The company has four underwriting platforms - Lloyd's, Bermuda, the UK and the US - and underwrites more than 30 classes of business. Following its ambitious expansion strategy, Catlin has revealed plans to establish four new European offices in 2007 in Paris, France; Barcelona, Spain; Zurich, Switzerland and Innsbruck, Austria.

The group is incorporated in Bermuda and its shares are traded on the London Stock Exchange. In 2005, the mix of business was 31% reinsurance, compared to 69% direct. Jardine says this mix is crucial to maintaining a diversified portfolio. "Our aim in terms of overall business is to have a balanced portfolio. If we write more non-correlated business, it gives us the opportunity to write more cat business. If you look at the current market we can write as much windstorm and California earthquake business as we like. But you cannot just balance it by European and Asian reinsurance, you have to do it by writing non-correlated business, which is extremely difficult and takes time."

"Our job internationally is to get closer to the business in situ. And we are writing business in, say, Sydney that would never come to London or Bermuda. While London is about the subscription market, internationally we are using local people to deliver a local product and 100% tends to be written in Catlin."

Following Hurricanes Katrina, Rita and Wilma (KRW) in 2005 and significant premium rate rises on many catastrophe-exposed lines at the 1 January 2006 renewals, Catlin announced a net income of $147.3m in the first half of 2006, up from $111.2m the previous year. Profit before tax was down to $139.1m, a decrease of 5.9% from $147.9m in 2005, although gross premiums written increased 15.5% to $903.1m from $781.7m. The group's combined ratio was up slightly but remained healthy at 84.7%. Commenting on the results at the time, CEO Stephen Catlin said: "(Catlin) had record premium volume and net income, while at the same time we have reduced our exposure to natural catastrophe risk by approximately one-third compared with a year ago and continued to diversify our risk portfolio."

Results for the full year 2006 had not yet been released at the time of going to press, although compared to Catlin's full year results in 2005 - and the impact of hurricane losses on those results - it seems clear that 2006 will have proved a much healthier year for the company (given the lack of any major catastrophe losses in 2006). For 2005, Catlin had posted a net income of $19.7m, representing a fall of 87% on the previous year, largely due to a $335.5m loss from KRW. That Catlin made any profit at all in a year of such extreme losses was an achievement at the time.

Jardine says Catlin will look to grow as aggressively as possible in a hard market but also to be there throughout the cycle. Last year, Catlin "derisked" its portfolio, he says, in response to the events of 2005 and like-for-like its exposure was down by about a third. "In the hardest of markets and most benign cat markets businesses like ours may underperform," he says "but where we outperform is in the soft market when it is hardest to make money."

One firm principle is that Catlin underwriters should never be afraid to turn business away. "The key thing is to be straightforward, honest and consistent," says Jardine. "Everybody wants to make money but at times you have to say 'I'm sorry but not today' and walk away from a deal."

Cautious future

Looking ahead, Jardine believes it will be an interesting year. "It is very Dickensian - the tale of two markets. In cat-exposed business we are still seeing reasonable price levels but in other business we are seeing intense competition and rates coming down." The Wellington deal has helped with Catlin's planned diversification of products, which means that, "For every dollar on non-correlated business we can increase cat business by 50 cents." Although the new Florida legislation had not been announced at the time of the interview, it is likely that Catlin - with its significant Florida focus - will have its share of challenges in 2007 as a result.

Jardine says it is critical that investors understand the nature of insurance and can ride with the cycles. "We are there to pay claims. Unfortunately that happens and we are there to make sure businesses and communities survive. Interestingly, the difference between the best and worst performing business is enormous. One McKinsey report shows the return on equity was 25% higher at the best performing company than at the worst. If you start breaking it down, it is actually about underwriting results. It is a simple message - the better the underwriting and the better the technology, the better you will be. Our target through the cycle is 10% return in excess of the risk-free rate. You cannot ignore the risk-free rate. If you surpass that and focus on the bottom line, you will be able to outperform the market."

Jardine adds that McKinsey also shows that the best performing companies rarely fall out of the top tier - and equally those at the bottom rarely climb up the ladder. Catlin, he believes, deserves its place and will continue to deliver.

- Liz Booth is a freelance journalist.

Catlin Paul Jardine, chief operating officer of the Catlin Group

Paul Jardine joined the Catlin Group in 2001 with specific responsibility for the development of new financial products. He was appointed chief executive of the Catlin Syndicate 2003 in March 2003 and chief operating officer of the Catlin Group in February 2004. Jardine began his career at Prudential Assurance Company. He moved to Coopers & Lybrand in 1987 and was appointed a partner in 1993, involved almost exclusively with issues dealing with Lloyd's and the London insurance market with a particular focus on US casualty business and corresponding long-tail claims. He also participated in the Lloyd's Reserving Project that estimated the 1992 and prior years' syndicate liabilities that were subsequently reinsured by Equitas. Jardine joined Equitas in 1996 as chief actuary. His responsibilities included assessing on an ongoing basis the liabilities reinsured by Equitas and monitoring the company's reserves. He was elected to the Equitas board in February 1999 and appointed to the additional post of commutations director.