Travelers sets up Cat bond

Travelers, the US (re)insurance giant, said it has set up catastrophe bond Longpoint Re II, a newly formed Cayman Islands special purpose vehicle designed to provide it with $250m of reinsurance from losses resulting from certain hurricane events in the northeastern United States.

The reinsurance agreements, entered into on December 18, 2009, will provide protection for covered events occurring between December 18, 2012 and December 18, 2013.

In connection with entering into the reinsurance agreements, Longpoint Re II successfully completed a $500m catastrophe bond offering comprised of $250m of Series 2009-1 Class A Principal At-Risk Variable Rate Notes due December 24, 2012 and $250m of Series 2009-1 Class B Principal At-Risk Variable Rate Notes due December 24, 2013.

The catastrophe bond program with Longpoint Re II will replace Travelers’ existing catastrophe bond program with Longpoint Re Ltd., which will expire in May 2010. The reinsurance purchased from Longpoint Re II is intended to work in conjunction with Travelers’ traditional reinsurance to provide $1bn of protection for Northeast hurricane events in excess of $2.25bn of losses.

Amounts payable under the two new reinsurance agreements with Longpoint Re II will be based on an index created by applying predetermined percentages to insured industry losses in each state in the covered area as reported by Property Claim Services (“PCS”) a division of Insurance Services Office, Inc., owned by Verisk Analytics, Inc. The calculation of index losses is designed to approximate Travelers’ actual losses from any covered event.

In the event of a covered loss, Travelers will be entitled to recover amounts under the reinsurance agreements if the index losses for a single occurrence reach an initial attachment amount of $2.25bn.

The full $250m coverage of each agreement is available on a proportional basis until index losses reach an initial exhaustion amount of $2.85bn. The attachment and exhaustion amounts will be reset annually to maintain modeled probabilities of attachment and expected loss on the catastrophe bonds equal to the initial modeled probabilities of attachment and expected loss.

This story was originally published by Reinsurance