Cat Bond Market Interest or Reinsurance Market Cost

The final tally on Travelers Co.’s Longpoint Re catastrophe bond is $500 million, twice the initial estimate and the largest issuance of 2009.

Longpoint is structured into two, $250 million, tranches set to expire in 2012, and will protect the insurer from hurricanes that cause more than $2.25 billion in losses in states including New York, New Jersey and Connecticut.

But the notion that Longpoint’s upsizing represents a strong vote of confidence in the catastrophe bond market may be misplaced.

According to Bloomberg estimates, the Hartford-based insurer will pay 5.4 percent over three-month U.S. Treasury Bills. Current three-month U.S. Treasuries are yielding between 6 and 7 basis points.

Separately, coastal risks — especially in the U.S. east coast — are seeing reinsurance rate increases despite a quite hurricane season and a broader decline in rates for the upcoming January renewal.

The pricing gap between traditional reinsurance and capital markets is slowly closing and may turn out to be the primary driver of new issuance in 2010.

That sentiment was born out by comments by an issuer (who declined to be named) that the catastrophe bond market was a popular way to “play off” pricing demands of traditional reinsurers.