Travelers 2010 Annual Report Download - page 32

however, hurricanes and earthquakes may produce significant damage in larger areas, especially those
areas that are heavily populated. The Company generally seeks to manage its exposure to catastrophes
through individual risk selection and the purchase of catastrophe reinsurance. The Company utilizes a
general catastrophe reinsurance treaty with unaffiliated reinsurers to manage its exposure to losses
resulting from catastrophes. In addition to the coverage provided under this treaty, the Company also
utilizes a catastrophe bond program, as well as a Northeast catastrophe reinsurance treaty, to protect
against certain losses resulting from catastrophes in the Northeastern United States.
General Catastrophe Reinsurance Treaty. The general catastrophe reinsurance treaty covers the
accumulation of net property losses arising out of one occurrence. The treaty covers all of the
Company’s exposures in the United States and Canada and their possessions and waters contiguous
thereto, the Caribbean and Mexico. The treaty only provides coverage for terrorism events in limited
circumstances and excludes entirely losses arising from nuclear, biological, chemical or radiological
attacks.
The following table summarizes the Company’s coverage under its General Catastrophe Treaty,
effective for the period July 1, 2010 through June 30, 2011:
Layer of Loss Reinsurance Coverage In-Force
$0 - $1.0 billion ............ Loss 100% retained by the Company, except for certain
losses covered by the Earthquake Excess-of-Loss Treaty as
described below
$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. 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 on a proportional basis 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 II for the reinsurance coverage. The reinsurance agreements
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 a third-party service provider. The reinsurance agreements 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.
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