Travelers cat losses nearing $500m aggregate reinsurance trigger

U.S. primary insurer Travelers catastrophe and severe weather losses have now eaten 92% of the way through the $1.3 billion retention sitting beneath the insurers new $500 million aggregate reinsurance cover.

In reporting its results today (full coverage of these on our sister site Reinsurance News) Travelers revealed that pre-tax and after reinsurance its catastrophe losses have reached $801 million in the first nine months of 2019.

However, the gross figure is much higher and now puts Travelers close to triggering the new aggregate reinsurance cover that it purchased at the beginning of this year.

At the January 2019 reinsurance renewals, insurer Travelers added a brand new $500 million aggregate property catastrophe excess of loss reinsurance treaty to its program, as it sought to provide an additional buffer for its earnings against frequency loss events.

The new $500 million aggregate reinsurance layer of protection to cover Travelers against smaller, frequency type catastrophe loss events, always looked a sensible addition, after it subsequently came to light that had this aggregate layer been in place over 2017 and 2018, Travelers would have benefited from a full recovery under the $500 million treaty.

Earlier this year we wrote that the new aggregate layer was demonstrating its potential to be effective in 2019 as well, as Travelers had already eaten through around 60% of the retention for this aggregate layer during the first-half of the year.

The erosion of the aggregate retention has continued during the third-quarter and it’s now clear that Travelers is only a few more losses away from collecting on this reinsurance protection from its counterparties.

Travelers $500 million property catastrophe aggregate excess of loss reinsurance treaty covers it for an accumulation of North American loss events, that have been designated by Property Claims Services (PCS) as catastrophes and also cause Travelers itself a loss of over $5 million per-event.

The treaty is effective across a $500 million layer in excess of its attachment at $1.3 billion, with the reinsurance covering 86% or $430 million of this layer and Travelers retaining the other 14% or $70 million.

As of the end of Q3 2019, Travelers qualifying aggregate losses have reached $1.2 billion, the companies executives revealed today during its earnings conference call.

With the retention almost completely used up, being 92% eroded in the first nine months of the year and only having $100 million left, Travelers looks very likely to begin claiming on this aggregate reinsurance protection, with recoveries of 86% of the next $500 million of qualifying losses possible once the layer attaches.

We understand their is likely some capital markets backed coverage in this aggregate reinsurance layer of Travelers, from any ILS funds that participated directly or via fronting.

Triggering of this layer will provide a good buffer of protection to Travelers Q4 and full-year earnings.

Travelers also has its catastrophe bond still in force, the $500 million Long Point Re III  2018-1, which it sponsored in 2018. But this is a per-occurrence protection and is designed to protect the insurer against significant large loss events, instead of multiple smaller ones like its new aggregate cover.