Travelers new aggregate reinsurance would have paid out in 2017/18

U.S. primary insurer Travelers would have benefited from a full recovery under its new $500 million aggregate reinsurance treaty in each of the last two years, has the coverage been in place.

As we reported earlier this week, Travelers successfully renewed its $2 billion corporate catastrophe excess of loss reinsurance treaty and added a brand new $500 million aggregate property catastrophe excess of loss treaty at the January 2019 renewals.

The new $500 million aggregate treaty provides coverage for smaller, frequency type catastrophe loss events.

It would specifically cover an accumulation of North American loss events that have been designated as a cat event by industry data aggregator Property Claims Services (PCS) and that had caused Travelers an indemnity loss of over $5 million each.

The new aggregate treaty covers a $500 million layer in excess of $1.3 billion, with the reinsurance covering 86% or $430 million of this layer and Travelers retaining the other 14% or $70 million of any losses.

Ensuring it doesn’t just pay out on the first big event that hits the insurer, the aggregate reinsurance has a maximum limit of $250 million of losses from any individual hurricanes and earthquakes.

What was it that stimulated Travelers to buy such a reinsurance cover at this January renewal season? Probably the last two years of losses.

Travelers CEO Alan Schnitzer said during the firms fourth-quarter earnings call that the new aggregate reinsurance layer would have helped the firm in 2017 and 2018.

“Over the last two years, probably not surprisingly given the elevated level of catastrophes, we’d have seen a full recovery under the treaty in each of the last two years,” Schnitzer explained to analysts.

The insurer modelled how the aggregate protection would have responded to losses over the last few years and found that 2017 and 2018 would have seen this pay out in full.

Those reinsurance firms and perhaps ILS funds that have backed the aggregate protection for 2019 will be aware of this fact, it’s assumed and have priced the aggregate treaty appropriately.

Dan Frey, CFO at Travelers, explained how the firm looked at its coverage needs, “The industry has experienced an elevated level of catastrophe losses in recent years. In response we updated our actuarial models to reflect the results of recent years and to give more weight to recent years when determining our view of normal expectations.”

That suggests Travelers see recent catastrophe and severe weather history as the normal levels of attrition it can expect across its portfolio, making the acquisition of more aggregate reinsurance even more relevant to the firm.

Discussing the new aggregate treaty specifically, Frey said, “We believe this new treaty provides a reasonable level of protection at an appropriate price. In terms of the accounting, there will be an impact on the underlying combined ratio in 2019 due to the effects of ceded premiums on total net earned premiums.”

Being an aggregate cover and with limited exposure to the very major loss events due to the $250 million limit for hurricanes and quakes, Frey said that he would expect the aggregate treaty to respond and pay out in the second-half of the year, if it is going to.

Given the last two years of elevated catastrophe loss activity this seems a very sensible purchase by Travelers, providing it with an added layer of protection for multiple catastrophe or severe weather loss events over the course of 2019.

Travelers is proactively managing its exposures with more than just reinsurance, reacting to the severe years of California wildfires by pulling back on its exposures in that state, our sister publication reported this week.

By working to better protect itself and manage its underwritten exposures as well, Travelers will be hoping to better protect its results, all with the help of traditional and alternative reinsurance capital.