Travelers 2015 Annual Report Download - page 21

and May 2018, respectively, and both agreements meet the requirements to be accounted for as
reinsurance in accordance with the guidance for reinsurance contracts. In connection with the
reinsurance agreements, Long Point Re III issued notes (generally referred to as ‘‘catastrophe bonds’’)
to investors in amounts equal to the full coverage provided under the reinsurance agreements as
described below. The proceeds of both issuances were deposited in reinsurance trust accounts. The
businesses covered by these reinsurance agreements are subsets of the Company’s overall insurance
portfolio, comprising specified property 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.
One reinsurance agreement with Long Point Re III expires in May 2016 and provides coverage of
up to $300 million to the Company for certain losses from hurricanes in the locations listed above. The
Company will be entitled to begin recovering amounts under this reinsurance agreement if the losses in
the covered area for a single occurrence reach an initial attachment amount of $1.058 billion. The full
$300 million coverage amount is available on a proportional basis until such covered losses reach a
maximum $1.608 billion. The coverage under the reinsurance agreement 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.
The other reinsurance agreement was entered into in May 2015 in connection with Long Point
Re III’s offering to unrelated investors of $300 million aggregate principal amount of catastrophe
bonds. This reinsurance agreement expires in May 2018 and provides coverage of up to $300 million to
the Company for losses from tropical cyclones, earthquakes, severe thunderstorms or winter storms in
the locations listed above. The attachment point and maximum limit under this agreement will be reset
annually to adjust the expected loss of the layer within a predetermined range. For the period May 16,
2015 through and including May 15, 2016, 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 $2.0 billion. The full $300 million coverage amount is available on a
proportional basis until such covered losses reach a maximum $2.50 billion. The coverage under the
reinsurance agreement is limited to specified property coverage written in the Company’s Personal
Insurance segment; Select Accounts, Middle Market (excluding Excess Casualty and Global Partner
Services), First Party (excluding Boiler & Machinery) and Specialized Distribution in the Company’s
Business and International Insurance segment; and Bond & Specialty Insurance Other in the
Company’s Bond & Specialty 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
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