Latest transaction with Newton Re will protect against US wind and quake, European wind and Japanese wind and quake

Catlin Group Limited has announced that it has purchased a collateralised $150m annual aggregate reinsurance contract which protects the group’s portfolio of property treaty reinsurance against accumulated losses from specific perils.

The transaction is unusual as it provides retrocessional ‘catastrophe bond’ type coverage for a diverse portfolio of property catastrophe exposures on an indemnity basis.

As it would be triggered by Catlin’s actual losses, it reduces the basis risk present in most index-based or parametric-based catastrophe bond products.

The coverage, which expires on 31 December 2010, will be triggered if Catlin’s losses from defined US windstorms and earthquakes, European windstorms, and Japanese windstorms and earthquakes exceed an annual aggregate threshold amount.

The coverage complements the collateralised catastrophe protections previously purchased by Catlin in 2006 and 2007 and its traditional reinsurance programme.

In the transaction, which was completed on 21 February, Catlin has entered into a reinsurance agreement with Newton Re Limited, a special purpose reinsurer established in the Cayman Islands.

Newton Re in turn has issued $150m of principal at-risk variable rate notes, the proceeds of which will be used to provide collateral for Newton Re’s obligations to Catlin under the reinsurance agreement.

The risk analysis relating to the transaction has been performed by Catlin, which will also perform similar analyses during the subsequent years of the agreement. Risk Management Solutions Inc. has and will continue to review the analysis provided by Catlin.

The notes, which were rated ‘BB’ by Standard & Poor's and ‘bb’ by A.M. Best, have a coupon of Libor plus 750 basis points.

The agreement is the third insurance-linked securities transaction in which Catlin has participated:

• In November 2006 Catlin Bermuda entered into a catastrophe swap agreement with Bay Haven Limited, 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 Bermuda would receive US$33.375 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 US$56.5 million in coverage in response to the third covered risk event.

• In December 2007 Catlin entered into a separate three-year collateralised transaction with Newton Re which provides US$225 million of protection in a swap format against large US earthquake and US windstorm events as triggered by insurance industry losses.

Stephen Catlin, chief executive of Catlin Group Limited, said:

“Our latest innovative transaction with Newton Re protects the Group’s treaty reinsurance portfolio against both severe catastrophic events and a series of smaller events. This fully collateralised coverage provides Catlin with economical, fixed-price protection until the end of 2010. The transaction, which fully complements our previous securitised reinsurance arrangements and our traditional reinsurance programme, further increases the security that Catlin provides to its policyholders and investors.”

Lehman Brothers and Willis Capital Markets advised Catlin on the transaction.