S&P Assigns ‘BBB’ Rating to Catlin Debt

January 9, 2007

Standard & Poor’s Ratings Services announced that it “has assigned its ‘BBB’ long-term preliminary ratings to the proposed U.S. dollar-denominated, perpetual, subordinated, callable, fixed-/floating-rate, noncumulative preferred shares and to the proposed fixed-/floating-rate, subordinated, callable notes to be issued by Bermuda-based Catlin Insurance Co. Ltd. (Catlin; A-/Stable/–).”

A.M. Best Co. has assigned an indicative rating of “bbb+” to Catlin’s debt issue (See IJ web site Jan. 5).

S&P noted that the “ratings on the securities are based on draft documentation, and are subject to confirmation following receipt of final particulars.” S&P also indicated that it expects to classify the shares as “strong,” at the upper level of its Category 2 (intermediate equity content) classification, being undated, subordinated, and with optional and mandatory interest-deferability features. The shares are expected to qualify as statutory capital under the Bermuda Monetary Authority’s regulatory regime and as Innovative Tier 1 capital for group regulatory capital purposes in the U.K.

“The notes, which rank as senior to the shares in the event of liquidation, are expected to qualify as Lower Tier 2 capital for group regulatory capital purposes in the U.K., and are similarly expected to be classified as “strong” by Standard & Poor’s, based on their long-term maturity, subordination, and optional interest-deferral features.”

S&P explained the details of the share and debt issue as follows: “Both the shares and the notes are callable a minimum of 10 years after issue and on every dividend/interest payment date thereafter. If not called, the interest rate margin will step up by 100 basis points, and the base rate will move from the fixed rate to floating three-month LIBOR. Early redemption is permissible if the securities fail to qualify as regulatory capital, or if there is a change in tax law resulting in the securities being subject to tax. In addition, early redemption on the shares is possible should voting rights be enacted.

“Dividends on the shares are subject to a dividend and capital-stopper mechanism, such that if Catlin does not declare a dividend on the shares, no cash dividend shall be paid to common stockholders and Catlin will not be permitted to purchase or redeem any junior-ranking stock. Mandatory payment deferral on the shares is only invoked in the event that Catlin does not have sufficient distributable reserves with which to fund the dividend or is unable to satisfy its local solvency requirements under Bermudan law. Suspension of dividends on the preferred and on common shares would enable Catlin to defer interest on the notes without such deferral constituting default. Interest deferral is also optional in the event of actual or likely regulatory intervention.”

The proceeds from the issue will “principally be used to repay the $500 million bridging loan facility initiated to finance the acquisition of Wellington Underwriting PLC (not rated), while also enabling Catlin to refinance its senior debt,” S&P continued. “Both hybrid instruments are eligible for inclusion as part of Catlin’s total adjusted capital up to Standard & Poor’s normal tolerance for Bermudan issuers of up to 15 percent, with the excess treated as debt for the purposes of leverage calculations.

“The ‘A-‘ long-term counterparty credit rating on Catlin reflects its status as a core subsidiary and primary risk carrier of Catlin Group Ltd. The rating is underpinned by the group’s diversified business franchise and risk profile relative to many of its Lloyd’s and Bermudan peers. The rating also reflects the group’s above-average long-term earnings and strong capitalization. These strengths are partially offset, however, by the group’s earnings volatility and high dependence on Lloyd’s (A/Positive) for business.”

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