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Catlin uses swap to gain extra catastrophe cover


HAMILTON, Bermuda--Catlin Group Ltd., the Bermuda-based insurer and reinsurer, said that its Bermuda-based subsidiary, Catlin Insurance Co. Ltd., has developed a catastrophe swap agreement that would provide it with coverage of up to around $200 million.

The transaction would provide Catlin with fully collateralized protection against what it describes as "severe" natural catastrophes. This deal would complement the protection that Catlin already buys through the traditional reinsurance marketplace, the company said.

Catlin said that the catastrophe swap would respond to up to six covered risk events over a three-year period. No payout would be made for the first three events.

Bay Haven Ltd., the Bermuda special-purpose vehicle being created for the program, would pay Catlin Bermuda $33.4 million per covered risk event after the third event, up to a maximum of six events.

The aggregate limit payable to Catlin Bermuda is $200.3 million.

The bond would cover hurricanes in the East Coast, Florida and Gulf Coast of the United States, U.S. earthquakes in California and in the New Madrid Seismic Zone, U.K. windstorms, continental European windstorms, and typhoons and earthquakes in Japan.

Only one payment would be made for each covered risk event.

The catastrophe swap would, however, respond to multiple occurrences of a given category of risk event, such as if more than one qualifying U.S. hurricane occurs during the period.

Catlin said that the catastrophe swap would be triggered for U.S. risk events if aggregate insurance industry losses worked out by Property Claims Services unit of Insurance Services Office Inc. meet or exceed defined threshold amounts.

Coverage for non-U.S. 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 were developed by catastrophe modeling agency Newark, Calif.-based Risk Management Solutions Inc.

Reinsurance broker Guy Carpenter & Co. Inc. also worked on the deal.

Bay Haven is issuing two sets of floating rate notes to investors to fund the coverage--Class A and Class B notes. The transaction was brought to the securities market last week by the insurance and weather derivatives team at ABN AMRO in London.

Catlin said that the bond will 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."