Travelers cat losses hit $1.4bn towards $2bn aggregate reinsurance trigger

In discussing their third-quarter 2022 results, senior executives of US primary insurance giant Travelers disclosed that the company has now accumulated $1.4 billion of qualifying catastrophe losses towards its $2 billion aggregate excess-of-loss reinsurance attachment point.

As we reported earlier, Travelers experienced $512 million of pre-tax and net catastrophe losses during Q3 2022.

Now, the companies executives have provided some more clarity during an earnings call.

Dan Frey, CFO, explained, “Our third quarter results include $512 million of pre-tax catastrophe losses, with $326 million related to hurricane Ian.”

He went on to explain what this means for the insurers aggregate reinsurance partners.

“Regarding cat losses and reinsurance, on a year-to-date basis through September 30th we’ve accumulated $1.4 billion dollars of qualifying losses for the aggregate retention of $2 billion on our property aggregate catastrophe XoL treaty,” Frey said.

Travelers completely exhausted its aggregate reinsurance through calendar year 2021, recovering the full $350 million that was available, $255 million of which was recovered in Q4 of that year.

That was the second year in a row that the insurers aggregate catastrophe cover was completely eroded, as its losses ate through the entire layer.

For 2022, Travelers’ aggregate catastrophe reinsurance treaty was restructed somewhat, with the renewed treaty covering a $500 million layer above an attachment of $2 billion. But only 45%, or $225 million, of losses in the layer are actually covered by this reinsurance in 2022, as Travelers will retain the other $275 million share as losses eat through the $2 billion attachment up to the $2.5 billion exhaustion.

Also of note is that Travelers aggregate reinsurance treaty only accumulates qualifying losses from PCS-designated catastrophe events in North America in excess of $10 million per catastrophe event, where as it was $5 million the year before.

So reinsurance capital providers, traditional or alternative, that backed Travelers aggregate reinsurance in 2022 will have hoped losses accumulated more slowly.

But so far this year, Travelers is now 70% of the way towards the aggregate reinsurance trigger after three-quarters of the year, so the final quarter’s catastrophe activity will be interesting to watch, as will the potential for any loss creep from hurricane Ian.

Frey also gave some colour on how Travelers is thinking about reinsurance right now, with its next renewals being at the January 1 renewal season.

“Based on what we’re hearing from the reinsurance community, sounds like the market is in for higher pricing and capacity constraints. In terms of primary carriers that’s going to impact some much more than others,” Frey said.

He continued to explain, “For two reasons we would expect to be less impacted than others. First, as a disciplined gross line underwriter we just don’t buy that much reinsurance compared to many others. Second, we have a long track-record of strong underwriting performance, consistently outperforming the industry.

“The upshot of those factors is that we generally expect to be able to obtain the reinsurance coverage we need at acceptable prices.”

Finally, Frey also said, “Because we’re less reliant on reinsurance, we should be less affected by price increases and capacity constraints. With less of an impact on our cost structure we should have the option to expand our margin advantage or to reflect that cost advantage in our pricing, making us more competitive for attractive new business opportunities.”

CEO Alan Schnitzer explained that Travelers estimated catastrophe losses from hurricane Ian are less than its market share in the affected states may have implied.

“In terms of catastrophe losses, as I’ve described before, strategic efforts we have undertaken in recent years have enabled us to more effectively manage our exposure to catastrophes and more efficiently mobilise our claim response.

“While there is always the potential for us to have outsized exposure to an event, those efforts contributed to losses for us from Hurricane Ian that, based on current estimates, are favourable relative to our corresponding market share. That’s consistent with our experience over the past five years,” Schnitzer said.

Adding that, “Our share of the industry’s property count losses over that period has been meaningfully lower than our corresponding market share. Our capabilities position us well to account for increasing frequency and severity of losses from natural catastrophe.”