Travelers 2009 Annual Report Download - page 33

The following table summarizes the Company’s coverage under its General Catastrophe Treaty,
effective for the period July 1, 2009 through June 30, 2010:
Layer of Loss Reinsurance Coverage In-Force
$0 - $1.0 billion . . . . . . . . . . . . Loss 100% retained by the Company
$1.0 billion - $1.5 billion . . . . . . 20.0% ($100 million) of loss covered by treaty; 80.0%
($400 million) of loss retained by Company
$1.5 billion - $2.25 billion . . . . . 56.7% ($425 million) of loss covered by Treaty; 43.3%
($325 million) of loss retained by Company
Greater than $2.25 billion . . . . . 100% of loss retained by Company, except for certain
losses incurred in the Northeastern United States, which
are covered by the Catastrophe Bond Program and
Northeast Catastrophe Treaty as described below.
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. The Company obtained reinsurance under the program by
entering into a reinsurance agreement with Longpoint Re Ltd. (Longpoint Re), an 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 agreement expires in May 2010.
On December 18, 2009, Longpoint Re II, Ltd. (Longpoint Re II), a newly formed independent
Cayman Islands insurance company, successfully completed an offering to unrelated investors of
$500 million aggregate principal amount of catastrophe bonds. In connection with the offering, the
Company and Longpoint Re II entered into two reinsurance agreements (covering a three-year and
four-year period, respectively), each providing up to $250 million of reinsurance from losses resulting
from certain hurricane events in the northeastern United States.
Under the terms of these reinsurance agreements, the Company is obligated to pay annual
reinsurance premiums to Longpoint Re and Longpoint Re II for the reinsurance coverage. The
reinsurance agreements entered into by the Company with Longpoint Re and Longpoint Re II utilize 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. (owned by Verisk
Analytics, Inc.). The reinsurance agreements entered into with Longpoint Re and Longpoint Re II as
part of the catastrophe bond program meet the requirements to be accounted for as reinsurance in
accordance with the guidance for reinsurance contracts. Amounts payable to the Company under the
reinsurance agreements will be determined by the index-based losses, which are designed to
approximate the Company’s actual losses from any covered event. The amount of actual losses and
index losses from any covered event may differ. The principal amount of the catastrophe bonds will be
reduced by any amounts paid to the Company under the reinsurance agreements.
The index-based losses attachment point and maximum limit are reset annually to maintain
modeled probabilities of attachment and expected loss on the respective catastrophe bonds equal to the
initial modeled probabilities of attachment and expected loss. In accordance with the Longpoint Re
program, the index-based losses attachment point and maximum limit were reset on May 8, 2009. For
the period May 8, 2009 through May 7, 2010, 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 $2.327 billion. The full coverage amount of
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