LONDON (Bloomberg) ? Lloyd?s of London is investigating Catlin Group Ltd.?s agreed ?591 million ($1.2 billion) takeover of Wellington Underwriting Plc after allegations of potential insider trading in insurance capacity ahead of the transaction.

?We are aware of the issue, and we are investigating,? Jennifer Culley, a spokeswoman for Lloyd?s, said in a telephone interview yesterday.

?I can?t say more than that.? Three hundred-year-old Lloyd?s is the world?s biggest insurance market.

Catlin, a property insurer that wrote coverage for New York?s World Trade Center, announced the cash and shares agreement to buy Wellington and create the biggest insurer in the Lloyd?s market on October 30.

Under the terms of the deal, Catlin paid 50 pence for every ?1 of Wellington?s underwriting capacity, Britain?s Sunday Telegraph reported yesterday. Weeks earlier, capacity in the Wellington syndicate was sold for a few pence in the pound as part of the annual auction process, the Telegraph said, without citing a source.

Lloyd?s investigation will focus on whether Catlin had discussions with Wellington before the auction and examine broader trading in Wellington capacity auctions prior to the announcement of the deal, the Telegraph reported.

Wellington denies any wrongdoing, the newspaper said.

Lloyd?s Culley said the newspaper article was ?broadly accurate? and declined to comment further.

Jim Burcke, London-based spokesman for Catlin, didn?t immediately return phone messages left on his mobile phone and at his office today. Calls to Catlin?s Bermuda headquarters weren?t answered.

An unidentified spokesman for Wellington told the Sunday Telegraph that the company had ?made all the disclosures we are required to make for all activities, from the capital auction to the takeover? to both the Financial Services Authority and Lloyd?s.

Calls to Wellington?s London offices yesterday weren?t answered.

The takeover would create the largest syndicate, or underwriting unit, on the Lloyd?s insurance market, with gross premiums of about $2.4 billion. Catlin provides coverage ranging from boats to nuclear reactors and planned to save costs through its domicile in Bermuda, where regulation is lighter and taxes are lower than in the UK.

Underwriting is the process of evaluating and pricing risks in insurance.

The Sunday Telegraph reported the Lloyd?s investigation earlier yesterday.