Travelers Aggregate Catastrophe Reinsurance Renews At Stricter Terms – The Travelers Companies, Inc. (NYSE:TRV)

U.S. primary insurer Travelers (NYSE:TRV) has renewed some of its core catastrophe reinsurance treaties at the January 2020 renewals, and its aggregate coverage has changed significantly, with the insurer set to retain a far greater share of its losses this year.

Travelers added a brand new $500 million aggregate property catastrophe excess of loss treaty at the January 2019 renewals. That aggregate treaty provided Travelers with coverage for smaller, frequency-type catastrophe loss events, covering the insurer for an accumulation of North American loss events, costing it more than $5 million each.

The 2019 aggregate catastrophe reinsurance treaty was structured across a $500 million layer of coverage in excess of an attachment of $1.3 billion, with reinsurance covering 86% or $430 million of this layer and Travelers only retaining the other 14% or $70 million.

That’s all changed for 2020, as Travelers has renewed its property aggregate catastrophe excess-of-loss reinsurance treaty for the year ahead, but at seemingly more stringent terms.

For 2020, the still $500 million layer of aggregate reinsurance protection would only attach at $1.55 billion of losses to Travelers and reinsurers only bear 56% of this or $280 million, while Travelers will now retain the other 44% or $220 million.

It’s impossible to know if this change is through choice, or whether reinsurance counterparties have demanded much tighter terms for this aggregate catastrophe reinsurance treaty renewal. But, as reinsurers have suffered losses on the aggregate treaties in recent years, it is possible that this is a reaction to it.

The company itself had previously said that, had the aggregate protection been in place in 2017 and 2018, it would have paid out to Travelers benefit.

In 2019, it came very close, and there may have been a small claim on the aggregate reinsurance program, it seems.

Travelers had said that its qualifying aggregate losses reached $1.2 billion gross at the end of the third-quarter of last year, which equated to $801 million pre-tax and after reinsurance considerations. At the end of 2019, the pre-tax and net of reinsurance catastrophe loss total had risen to $886 million, suggesting the possibility that the gross cat loss figure may have reached above the $1.3 billion aggregate trigger point before the end of the year.

So, it’s possible that this is an example of where reinsurers have held the line at renewals this year, although we cannot be certain, and it is also possible Travelers just elected to have less aggregate protection in place for 2020 (seems a little unlikely, though).

With the higher trigger and much higher retention level, Travelers is now less well-protected from this aggregate treaty than it was last year, although terms around individual hurricanes and earthquakes remain as a maximum qualifying loss of $250 million per event.

Travelers also renewed its main $2 billion corporate catastrophe excess of loss treaty at the January 2020 renewals. This treaty has renewed, offering the same coverage terms and features, it seems, with no changes evident from the information the insurer has disclosed. This treaty provides Travelers with reinsurance coverage against losses from certain property events, covering both one or multiple occurrences. Events have to surpass a $100 million deductible before losses can begin to qualify under this reinsurance treaty.

This corporate catastrophe reinsurance treaty attaches at $3 billion of losses, and Travelers is covered for 75% of losses across the $2 billion layer above it. Hence 75%, or $1.5 billion, of losses are reinsured, while the other 25% or $500 million are retained by the insurer.

So, Travelers enters 2020 still with the same amount of occurrence protection from its calendar year XoL treaty, but significantly reduced aggregate protection from the January renewed aggregate reinsurance treaty arrangement.

Travelers has a range of other reinsurance treaties that are all either up for renewal around the mid-year 2020 or remain in force beyond that date, including its $500 million Long Point Re III Ltd. (Series 2018-1) that matures in 2022.

Travelers reported its fourth-quarter and full-year results on January 23, characterised by worse underlying underwriting performance and weaker reserves.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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