Travelers 2008 Annual Report Download - page 34

Catastrophe Bond Program. In May 2007, the Company announced the establishment of a
multi-year catastrophe bond program to provide reinsurance protection for losses resulting from
hurricanes and certain other catastrophes in the Northeast United States (from New Jersey to Maine).
The Company may obtain reinsurance under the program by entering into one or more reinsurance
agreements with Longpoint Re Ltd. (Longpoint Re), a newly-formed independent Cayman Islands
insurance company. Longpoint Re successfully completed an offering to unrelated investors under the
program of $500 million aggregate principal amount of catastrophe bonds on May 8, 2007. In
connection with the offering, the Company and Longpoint Re entered into a three-year reinsurance
agreement providing up to $500 million of reinsurance from losses resulting from certain hurricane
events in the Northeast United States. The reinsurance agreement entered into by the Company and
Longpoint Re utilizes a dual trigger that is based upon the Company’s covered losses incurred and an
index that is created by applying predetermined percentages to insured industry losses in each state in
the covered area as reported by Property Claim Services, a division of Insurance Services Offices, Inc.
Amounts payable to the Company under the reinsurance agreement will be determined by the index-
based losses, which are designed to approximate the Company’s actual losses from any covered event.
The principal amount of the catastrophe bonds will be reduced by any amounts paid to the Company
under the reinsurance agreement. The index-based losses attachment point and maximum limit are
reset annually to maintain a probability of loss on the catastrophe bonds equal to the initial modeled
probability of loss. For the period May 8, 2007 through May 7, 2008, the Company was entitled to
begin recovering amounts under the reinsurance agreement if the index-based losses in the covered
area for a single occurrence reached an initial attachment amount of $2.25 billion. The full coverage
amount of $500 million was available on a proportional basis until index-based losses reach a maximum
$3.0 billion limit. In accordance with the program, the index-based losses attachment point and
maximum limit were reset on May 8, 2008. Through May 7, 2009, the Company will be entitled to
begin recovering amounts under the reinsurance agreement if the index-based losses in the covered
area for a single occurrence reach an initial attachment amount of $2.425 billion. The full coverage
amount of $500 million is available on a proportional basis until index-based losses reach a maximum
$3.22 billion limit. The Company has not incurred any losses subject to the agreement since its
inception.
The $500 million limit is secured by a combination of assets held in a trust and a Total Return
Swap with Goldman Sachs International that is guaranteed by The Goldman Sachs Group, Inc.
(Goldman Sachs). The value of the trust assets at December 31, 2008 was estimated by Goldman Sachs
to be $342 million. Subsequent to December 31, 2008, one asset of the trust failed to meet the
investment guidelines of the trust and, accordingly, was sold on February 11, 2009. Pursuant to the
Total Return Swap, upon sale of the asset, Goldman Sachs contributed cash to the trust equal to the
difference between the sale proceeds of $53 million and the $100 million face value of the asset.
Northeast Catastrophe Reinsurance Treaty. In addition to its General Catastrophe treaty and its
multi-year catastrophe bond program, the Company also is party to a Northeast General Catastrophe
treaty which provides up to $500 million of coverage, subject to a $2.25 billion retention, for losses
arising from hurricanes, earthquakes and winter storm or freeze losses from Virginia to Maine for the
period July 1, 2008 through June 30, 2009. Losses from a covered event (occurring over several days)
anywhere in the United States, Canada, the Caribbean and Mexico may be used to satisfy the retention.
Recoveries under the catastrophe bond program described above (if any) would be first applied to
reduce losses subject to this treaty.
Terrorism Risk Insurance Acts. On November 26, 2002, the Terrorism Risk Insurance Act of 2002
(the Terrorism Act) was enacted into Federal law and established the Terrorism Risk Insurance
Program (the Program), a temporary Federal program in the Department of the Treasury, that provided
for a system of shared public and private compensation for certain insured losses resulting from acts of
terrorism or war committed by or on behalf of a foreign interest. The Program was scheduled to
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