Bermuda-based special purpose insurer (SPI) Lodestone Re Ltd. has been set up to issue $425 million worth of catastrophe bonds to protect Chartis against US hurricanes and earthquakes.

Chartis, the property and casualty insurance arm of American International Group, had originally sought $250 million in protection.

Lodestone Re will fund the coverage through the issuance of two tranches of cat bonds - $175 million of Class A notes and $250 million of Class B notes. Rating agency Standard & Poor's rated the Class A notes at BB+ and Class B notes at BB.

The transaction, which was completed on Wednesday, will provide Chartis with fully collateralised coverage against losses from US hurricanes and earthquakes on a per-occurrence basis until May 2013 using an index trigger with state-specific payment factors.

For a hurricane event, Lodestone Re will cover losses in the District of Columbia and states of Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Virginia, and West Virginia. For an earthquake event, the covered area is the District of Columbia and all 50 states.

Risk analysis for the transaction was based on Risk Management Solution's (RMS) Hurricane Model Version 9.0 and RMS North America Earthquake Model Version 9.0.

Kristian Moor, president and CEO of Chartis, said: "As part of our first effort to obtain reinsurance coverage supported by capital market instruments, this transaction represents another important milestone in Chartis' pursuit of increasing financial flexibility and enhancing our risk management capabilities."

Lodestone Re was incorporated in Bermuda and has set up a programme structure enabling potential future catastrophe bond issuances.