Canadian Underwriter

Catlin securitizes against natural catastrophe

September 28, 2006   by Canadian Underwriter

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Catlin Insurance Company Ltd. of Bermuda plans to enter into catastrophe swap agreement that would provide it with coverage of up to US$200.25 million in the event of a series of severe natural catastrophes.
The transaction, which is subject to completion of contractual arrangements, would provide Catlin with competitively priced and fully collateralized protection against severe natural catastrophes.
The Company says this transaction, which is being brought to the securities market this week by ABN AMRO London, would complement the traditional reinsurance protection it already has.
The transaction would be the first publicly rated collateralized debt obligation of natural catastrophe risk, according to Catlin. “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,” the Company said in a press release.
This new class of security has been developed in conjunction with Guy Carpenter & Company Inc. and Risk Management Solutions Inc.
Catlin Bermuda says it plans to purchase the catastrophe swap from a special purpose vehicle, Bay Haven Limited. Under the agreement, Bay Haven would in turn issue to investors (US)$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, according to Catlin.
The catastrophe swap would respond to covered risk events occurring during a three year period. No payment would be made for the first three such risk events. Bay Haven would pay Catlin Bermuda US$33.375 million per covered risk event thereafter, up to a maximum of six events. The aggregate limit payable to Catlin Bermuda is (US)$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 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.
The first two events paid under the catastrophe swap would impact the Class B notes; subsequent events, up to the limit of six events over the three year period, would impact the Class A Notes.
“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,” Stephen Catlin, chief executive of Catlin Group Ltd. “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.”