Travelers recovered $101m under aggregate reinsurance treaty in Q4 2019

Travelers, the U.S. primary insurance giant, made $101 million of reinsurance recoveries under its aggregate catastrophe treaty in 2019, as its losses surpassed the attachment point for this layer of its program in the fourth quarter of the year.

Travelers added this $500 million aggregate property catastrophe excess of loss treaty at the January 2019 renewals, as it looked to better protect itself against frequency losses from severe weather and other smaller catastrophe events.

The 2019 year aggregate catastrophe reinsurance treaty was structured across a $500 million layer in excess of an attachment of $1.3 billion, with reinsurance covering 86% or $430 million of this layer and Travelers retaining the rest.

The company has now disclosed that its losses reached above the $1.3 billion trigger point in the fourth-quarter of the year and it benefited from $101 million of recoveries under the aggregate catastrophe reinsurance treaty.

Travelers CFO Dan Frey explained during the insurers earnings call last week, “Our fourth quarter results include $85 million of pre-tax cat losses, consisting of $186 million of cat events partially offset by $101 million of cat recoveries under the new treaty.”

As Travelers retains 14% of losses above the $1.3 billion attachment point for the aggregate reinsurance treaty, it seems the firms gross qualifying annual aggregate losses must have reached to around $1.418 billion, of which its reinsurance partners paid the $101 million in recoveries.

Losses that qualified under the terms of this aggregate treaty had reached $1.2 billion as of the end of Q3 2019, so the remaining just over $200 million must have been added during the last quarter of the year.

As we explained last week, Travelers has adjusted the aggregate catastrophe reinsurance treaty for 2020, lifting the attachment point to $1.55 billion of losses, covering a $500 million layer again, but with the insurer retaining a much greater share, with reinsurers on the hook for 56% of the layer or $280 million.

So had the new treaty been in place for 2019 it would not have been triggered at all.

Travelers said that the increased attachment point of the aggregate catastrophe reinsurance treaty is due to the growth in its property insurance book, saying also that as it placed less of the layer in 2020 it expects less of a hit to its combined ratio.

But for 2019 the hit to the full-year combined ratio due to the aggregate coverage was only half a percentage point and in Q4, when it began to make reinsurance recoveries under the layer, the benefit to the combined ratio was a full percent.

Travelers seems to be tweaking this layers coverage to try and optimise the protection to cover the frequency severe weather events that can be most impactful to its earnings.

With reinsurance recoveries made in 2019, the aggregate cat treaty has certainly proven its usefulness for the insurer.