Catlin pays $225m for earthquake, hurricane protection in Cat swap deal
By Alex Wright
Bermuda-based Catlin Insurance has snapped up $225 million worth of coverage under a catastrophe swap agreement in the event of severe US natural catastrophes over a three-year period.
The transaction provides Catlin Group with competitively priced and fully collateralised protection amounting to $87.5 million in the event of a severe US earthquake and $137.5 million in the event of a severe US hurricane.
The coverage complements the catastrophe protection that Catlin purchases through the commercial reinsurance market as well as the three-year catastrophe swap agreement that Catlin Bermuda completed in November 2006.
In the transaction, Catlin Insurance has entered into a risk transfer agreement with Newton Re, a special purpose reinsurer established in the Cayman Islands. The structure of Newton Re will enable Catlin to access the capital markets for further risk transfer transactions quickly and efficiently.
Newton Re in turn has issued $225 million of three-year principal at-risk variable rate notes in two classes, the proceeds of which will be used to provide collateral for Newton Re's obligations to Catlin Bermuda under the risk transfer agreement. The Class A Notes, in the principal amount of $87.5 million, are exposed to US earthquake events, while the Class B Notes, in the principal amount of $137.5 million, are exposed to US hurricane events.
Catlin will make recoveries under the catastrophe swap agreement in the event of a US earthquake or hurricane whose losses exceed a threshold amount.
The threshold is determined by the application of a pre-determined formula with respect to insurance industry losses reported by Property Claims Service, a division of ISO Services.
Stephen Catlin, chief executive of Catlin Group Limited, said: "I am pleased to announce that Catlin has participated in another innovative transaction that will provide the Group with protection in the event of a severe earthquake or hurricane striking the United States.
"This transaction further strengthens Catlin's ability to withstand claims from natural catastrophes and increases the security that Catlin provides both to its policyholders and its investors.
"The transaction provides Catlin with fixed-price protection for a three-year period, whilst mitigating the credit and dispute risks that are inherent in conventional reinsurance transactions."
The Newton Re transaction is the second insurance-linked securities transaction in which Catlin has participated.
In November 2006 Catlin Insurance entered into a catastrophe swap agreement with Bay Haven, a Cayman special purpose vehicle, that would respond to a wide range of covered risk events during a three-year period.
No payment would be made for the first three such risk events, but Catlin Insurance would receive $33.37 million per covered risk event thereafter, up to a maximum of six events.
Catlin Bermuda subsequently entered into further catastrophe swap agreements that would provide $56.5 million in coverage in response to the third covered risk event.
