Newton Re Ltd. (Series 2008-1)

This 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.

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 US$150 million 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 have a coupon of Libor plus 750 basis points.

The collapse of the Lehman Brothers in 2008 left the Class A tranche of Newton Re Ltd. (Series 2008-1) notes without a viable total return swap counterparty. The deal matured on the 7th January 2011 but failed to make a final payment to noteholders. Instead of receiving the full payment some of the noteholders of Newton Re accepted an assignment of the collateral in its place. As a result, rating agency A.M. Best decided that the failure to pay constituted a default as Newton Re Ltd. failed to meet its financial obligations to the noteholders.