Travelers chose cat bond over reinsurance thanks to price in 2018: CFO

U.S. property & casualty insurance giant Travelers took advantage of keen pricing conditions in the ILS and capital markets this year, as the firm upsized its catastrophe bond renewal Long Point Re III  2018-1 to $500 million, while at the same time shrinking one of its traditional reinsurance treaties.

At the mid-year reinsurance renewal season this year Travelers $300 million Long Point Re III 2015 catastrophe bond matured and as a result the insurer looked to replace this layer with a fresh cat bond issuance.

That fresh 2018 issuance was well-received and demand from ILS and cat bond investors helped Travelers to upsize the bond from its initial target of $300 million (to replace the maturing deal) to a much larger $500 million, as it leveraged the capital markets for an increased share of its overall reinsurance arrangements.

As a result of the upsizing of the catastrophe bond to provide an extra $200 million of reinsurance protection, Travelers opted to downsize one of its reinsurance treaties at July 1st, shrinking its Northeast Property Catastrophe Excess-of-Loss Reinsurance.

CFO of Travelers Jay Benet explained during the firms second-quarter earnings call yesterday, “While the structure of our cat reinsurance is generally consistent with the prior year we did take advantage of the current pricing environment to increase our cat bond limit by $200m, while reducing our Northeast Property Cat Excess-of-Loss Treaty limit by the same amount.”

The Long Point Re III catastrophe bond specifically covers Travelers with reinsurance against losses from U.S. tropical cyclones, earthquakes, severe thunderstorms, and winter storms, with the coverage only applying to Northeastern U.S. states.

On the Long Point Re III cat bond, Benet said, “Through May 24th 2019 the full $500 million of limit is available after covered losses from a single occurrence reach $1.9 billion and until such covered losses reach a maximum of $2.4 billion.”

The insurers Northeast Property Catastrophe Excess-of-Loss Reinsurance Treaty was renewed at July 1st to provide a smaller $600 million part of an $850 million layer of coverage, subject to a $2.25 billion retention. Hence this sits alongside at least part of the new cat bond coverage in Travelers reinsurance tower.

So the insurer has used the cat bond enlargement to cover more of the layer of risk that its northeast reinsurance treaty had previously covered, allowing the firm to capitalise on whichever form of capital offered the greatest cost-efficiencies.

This year it was the cat bond market that won out, offering the greatest price advantage, resulting in the growth of the Travelers Long Point Re III 2018 cat bond to $500 million and less risk being ceded through the firms traditional reinsurance treaty.

It will be interesting to see whether companies like Travelers look to take ongoing advantage of the attractive rates in the cat bond market, perhaps bringing another deal or upsizing Long Point again in years to come.