Travelers 2011 Annual Report Download - page 31

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, 2011 through June 30, 2012:
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, except for
certain losses incurred in the Northeastern United States,
which may be covered by the Catastrophe Bond Program
as described below.
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 with respect to any covered event will be
determined by the index-based losses from such event (which are designed to approximate the
Company’s actual losses), but cannot exceed the Company’s actual losses from such event. The
Company’s actual loss experience may differ from the index-based losses. The principal amount of the
catastrophe bonds will be reduced by any amounts paid to the Company under the reinsurance
agreements.
The attachment point for the index-based losses and the 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. The two reinsurance
agreements provide protection for covered events occurring before or on December 18, 2012 and
December 18, 2013, respectively. In accordance with the Longpoint Re II program, the index-based
losses attachment point was reset on May 1, 2011. For the period May 1, 2011 through April 30, 2012,
19