The Travelers Companies Inc. (TRV) has raised $500 million selling catastrophe bonds, or “cat bonds.” Travelers entered into two reinsurance agreements with Longpoint Re II Ltd., whereby Longpoint Re II completed two cat bonds offering of $250 million each. Each cat bond provides protection for up to $250 million of reinsurance from losses resulting from certain hurricane events in the northeastern United States occurring on or before Dec. 18, 2012, and on or before Dec. 18, 2013.
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 $2.25 billion. The full $250 million coverage of each agreement is available on a proportional basis until index losses reach an initial exhaustion amount of $2.85 billion.
The cat bond program with Longpoint Re II replaces Travelers’ existing cat bond program with Longpoint Re Ltd., which expires in May 2010.
Since Sept. 30, 2009, 4 cat bonds have been issued in the market. In October, Mexico sold $290 million in cat bonds through The World Bank. In November, Flagstone Reinsurance Holdings Ltd. (FSR) issued $175 million in cat bond protection through Montana Re Ltd. Earlier in December; Swiss Reinsurance Co. sold $150 million in cat bonds through its Successor X Ltd. bond program.
Cat bonds are risk-linked securities that transfer a specified set of risks from a sponsor to investors. They are often structured as floating rate bonds whose principal is lost if specified trigger conditions are met. If triggered, the principal is paid to the sponsor. The triggers are linked to major natural catastrophes. Cat bonds are typically used by insurers as an alternative to traditional catastrophe reinsurance.
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