S&P Rates Catlin Re ‘A’; Sees ‘Key Benefits’ from Swiss-based Subsidiary

December 21, 2010

Standard & Poor’s Ratings Services has assigned its ‘A’ counterparty credit and financial strength ratings to Switzerland-based Catlin Re Switzerland (CRCH), a new insurance entity created as a subsidiary to Catlin Insurance Co. Ltd. (CICL; A/Stable). The outlook is stable.

“We consider CRCH to be a core subsidiary of the Catlin Group, owing to its operational, strategic, and financial integration with the rest of the group, and the size of its capital base,” noted credit analyst Dennis Sugrue.

CRCH will operate in Switzerland with a branch in Bermuda. “We recognize the Swiss operation as a platform for the group to expand its foothold in the continental reinsurance market, which affirms our view of this subsidiary as core to group operations,” S&P continued.

Catlin Group Ltd. (Catlin, or the group), the Bermuda-based holding company, is the ultimate owner of CRCH, via CICL. “The capital, premiums, and contracts associated with intragroup quota-share reinsurance are currently written out of CICL and will be seamlessly transferred to CRCH,” S&P explained. “On receiving all regulatory approvals, the Bermuda-based branch of CRCH will take on these operations. CICL will continue to write the remaining outward reinsurance, uninterrupted.

“We believe that the new group structure and Swiss domicile will provide Catlin with three key benefits:
— An avenue into the European reinsurance market, which is difficult to penetrate from London and Bermuda;
— Enhancement of its capital structure and improved capital and tax efficiency; and
— Protection for the Catlin group should the tax treaty between the U.S. and Bermuda change materially.

CRCH will manage its two operations separately. The intragroup reinsurance operations will transfer from CICL to the Bermuda branch and continue as before. The Swiss-based operation will build a stable platform in the European reinsurance market, focusing on trade credit, surety, and political risk lines with the goal of developing a global presence in these businesses, and eventually entering into the treaty reinsurance market in Europe.

Catlin has brought in a team of underwriters with extensive experience and successful track records in their respective European markets, and we expect that CRCH will obtain a modest share of less than 1 percent of the continental reinsurance market in coming years.

S&P also said that the ratings on CRCH reflect its view that the “operations in the Bermuda branch will continue to be a core and integral part of Catlin’s group structure, and that the new lines of business written in Europe will further strengthen the group’s foothold in the continental market. CRCH will represent more than one-third of the group’s capital base from inception, and will contribute almost half of group gross written premium over the next few years.

“The ratings on the core subsidiaries of Catlin Group Ltd. reflect Catlin’s strong competitive position, strong operating performance, strong capitalization, and strong enterprise risk management. These strengths are offset, however, by the difficult pricing conditions in many of the group’s major lines of business and the potential material risk posed to the group’s balance sheet as a result of uncertainties surrounding the new investment strategy.

Sugrue indicated that the “stable outlook reflects our expectation that Catlin’s competitive position will remain strong, driven by continued cycle management and implementation of the diversification strategy. Premium growth will primarily stem from the European lines of business in the early years, with the U.S. also playing a major role. Given the soft pricing in many of its lines, we anticipate that the London market operations will pare back their writings. We also expect operating performance to remain strong and capitalization to support the current rating,”

S&P added that “given the recent upgrade of the group in late 2009, positive rating movement is unlikely over the next 12 months. However, should Catlin continue to execute its diversification strategy and further establish itself in the U.S. and Europe, in conjunction with an improved rating environment, we could review the rating for upward potential. On the other hand, any significant unforeseen volatility (catastrophe or otherwise) in the group’s operating results or balance sheet caused by poor investment management could prompt us to review the rating with negative implications.

Source: Standard & Poor’s

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