Catlin Enters $200 Million Cat Swap

October 2, 2006

The Bermuda-based Catlin Group Limited, an international specialty P/C insurer and reinsurer, announced that an operating subsidiary, Catlin Insurance Company Ltd. of Bermuda, “intends, subject to completion of contractual arrangements, to enter a catastrophe swap agreement that would provide it with coverage of up to $200.25 million in the event of a series of severe natural catastrophes.”

Catlin said the transaction would provide it “with competitively priced and fully collateralized protection against severe natural catastrophes, and would “complement the protection that Catlin already purchases through the traditional reinsurance marketplace.”

The bulletin also noted: “The transaction, which is being brought to the securities market this week by ABN AMRO London, would be the first publicly rated collateralized debt obligation (‘CDO’) of natural catastrophe risk. The catastrophe bond is thought to be the first of its kind to offer very low-risk/low-volatility investors, such as pension funds and life insurers, the diversification and yield benefits of natural catastrophe exposure.

“This new class of security has been developed in conjunction with Guy Carpenter & Company Inc., one of the world’s leading reinsurance brokers, and Risk Management Solutions Inc. (‘RMS’), the world’s leading provider of catastrophe modeling solutions.
Catlin Bermuda would purchase the catastrophe swap from a special purpose vehicle, Bay Haven Limited. Bay Haven would in turn issue to investors $200.25 million in three year Floating Rate Notes, divided into Class A and Class B Notes. The proceeds of those notes would comprise the collateral for Bay Haven’s obligations to Catlin Bermuda under the catastrophe swap.

“Standard & Poor’s Ratings Services is expected to assign a ‘AA’ senior secured debt rating to the Class A Notes and is expected to assign a ‘BBB-‘ senior secured debt rating to the Class B notes. This is expected to be the first transaction linked to natural peril risk to be rated ‘AA’ by Standard & Poor’s.”

The transaction covers risk events occurring during a three year period. “No payment would be made for the first three such risk events,” said the announcement. Bay Haven would pay Catlin Bermuda $33.375 million per covered risk event thereafter, up to a maximum of six events. The aggregate limit payable to Catlin Bermuda is $200.25 million.

“The categories of risk events to be covered by the transaction are: US hurricanes (Florida, Gulf States and East Coast), Californian earthquakes, New Madrid (US Midwestern) earthquakes, UK windstorms, European (excluding UK) windstorms, Japanese typhoons and Japanese earthquakes.

“Only one payment would be made for each covered risk event, but the catastrophe swap would respond to multiple occurrences of a given category of risk event, such as if more than one qualifying US hurricane occurs during the period.

“The catastrophe swap would be triggered for US risk events if aggregate insurance industry losses as estimated by Property Claims Services (‘PCS’) meet or exceed defined threshold amounts. Coverage for non-US risk events would be triggered if specific parametric criteria, such as wind speeds or ground motions, are met or exceeded. The stochastic risk analyses, definitions of covered events and parametric trigger solutions have been developed by RMS.”

Chief Executive Stephen Catlin commented: “The pattern of natural catastrophes over the past several years has focused attention on how insurers and reinsurers will be able to respond to the increasing frequency and economic severity of these events. This transaction, when completed, will strengthen Catlin’s ability to withstand claims arising from a series of severe natural catastrophes. Along with the steps Catlin has already taken to limit its exposure to natural catastrophe risk, the catastrophe swap will increase the security that Catlin provides to both policyholders and investors.”

Erik Manning, Insurance & Weather Derivatives Group at ABN AMRO, added: “For the first time, pension funds and other institutional investors will have the ability to invest in these near zero-beta investments, providing genuine investment portfolio diversity with the benefit of high investment grade ratings. Bay Haven has opened up the world of Insurance-Linked Securities to a whole new breed of investors.”

Tibor Winkler, director of risk markets at RMS, in London noted: “RMS is very pleased to have participated in the structuring and placement of this transaction of natural catastrophe insurance risk into a segment of the capital markets hitherto virtually untapped by this asset class. As part of our long term commitment to this asset class, RMS, the leading provider in this space, continues to work with the market for the success of new transactions like Bay Haven.”

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