Travelers 2014 Annual Report Download - page 23

Table of Contents
for the period May 1, 2014 through June 6, 2015, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the
losses in the covered area for a single occurrence reach an initial attachment amount of $1.772 billion. The full $250 million coverage amount is
available on a proportional basis until covered losses reach a maximum $2.331 billion.
On May 16, 2013, Long Point Re III completed a second offering to unrelated investors of $300 million aggregate principal amount of
catastrophe bonds. In connection with the offering, the Company and Long Point Re III entered into a three
- year reinsurance agreement providing
for coverage to the Company for certain losses from a hurricane in the northeastern United States. Similar to the first arrangement with Long Point
Re III, the proceeds of the offering were deposited in a reinsurance trust account. The attachment point and maximum limit are reset annually, with
the ability of the Company to adjust the expected loss of the coverage layer (the difference between the attachment point and the maximum limit)
within a predetermined range. The attachment point, maximum limit and insurance percentage were reset in April 2014. Accordingly, for the period
May 17, 2014 through May 16, 2015, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the losses in the
covered area for a single occurrence reach an initial attachment amount of $1.222 billion. The full $300 million coverage amount is available on a
proportional basis until covered losses reach a maximum $1.772 billion.
The business covered by these reinsurance agreements is a subset of the Company's overall insurance portfolio, comprising property
insurance and related coverages spread across the following geographic locations: Connecticut, Delaware, District of Columbia, Maine, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Vermont. The coverage under both reinsurance
agreements is limited to specified property coverage written in the Company's Personal Insurance segment, and within Select Accounts and
Commercial Accounts in the Company's Business and International Insurance segment.
Under the terms of both reinsurance agreements, the Company is obligated to pay annual reinsurance premiums to Long Point Re III for the
reinsurance coverage. Amounts payable to the Company under both reinsurance agreements with respect to any covered event cannot exceed the
Company's actual losses from such event. The principal amount of the respective catastrophe bond will be reduced by any amounts paid to the
Company under the respective reinsurance agreement.
As with any reinsurance agreement, there is credit risk associated with collecting amounts due from reinsurers. With regard to Long Point Re
III, the credit risk is mitigated by reinsurance trust accounts that have been funded by Long Point Re III with money market funds that invest solely
in direct government obligations and obligations backed by the U.S. government with maturities of no more than 13 months. The money market
funds must have a principal stability rating of at least AAAm by Standard & Poor's on the issuance date of the bonds and thereafter must be rated
by Standard & Poor's. Other permissible investments include money market funds which invest in repurchase and reverse repurchase agreements
collateralized by direct government obligations and obligations of any agency backed by the U.S. government with terms of no more than 397
calendar days, and cash.
At the time the agreements were entered into with Long Point Re III, the Company evaluated the applicability of the accounting guidance that
addresses variable interest entities or VIEs. Under this guidance, an entity that is formed for business purposes is considered a VIE if: (a) the equity
investors lack the direct or indirect ability through voting rights or similar rights to make decisions about an entity's activities that have a
significant effect on the entity's operations, or (b) the equity investors do not provide sufficient financial resources for the entity to support its
activities. Additionally, a company that absorbs a majority of the expected losses from a VIE's activities or is entitled to receive a majority of the
entity's expected residual returns, or both, is considered to be the primary beneficiary of the VIE and is required to consolidate the VIE in the
company's financial statements.
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