Catlin Bermuda is set to enter a catastrophe swap agreement that would provide it with coverage of up to $200m in the event of a series of severe natural catastrophes.
The transaction, which is being brought to the securities market this week by ABN AMRO London, would be the first publicly rated collateralised debt obligation of natural catastrophe risk.
Developed in conjunction with Guy Carpenter and RMS, the cat 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.
Under the agreement, Catlin Bermuda would purchase the catastrophe swap from a special purpose vehicle, Bay Haven.
Bay Haven would in turn issue to investors $200.25m in three year Floating Rate Notes, divided into Class A and Class B Notes. The 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$33.375m per covered risk event thereafter, up to a maximum of six events.
Risk events to be covered include US hurricanes, Californian earthquakes, European windstorms and Japanese typhoons and earthquakes.
Standard & Poor's 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.
Stephen Catlin, chief executive of Catlin Group, said: “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.”
