Hurricane Ian erodes more of Travelers’ aggregate reinsurance retention

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U.S primary insurer Travelers has now accumulated $1.4 billion of qualifying losses for the retention of $2 billion on its property aggregate catastrophe excess of loss treaty, as the carrier booked losses of $326 million related to hurricane Ian in the third quarter.

TravelersThis morning, Travelers reported a strong set of results for both the third quarter and first nine months of the year, with net income of $454 million despite higher catastrophe losses of $512 million, net of reinsurance, and net realised investment losses of $72 million.

Following its announcement, executives discussed the results on an earnings call, during which Chief Financial Officer (CFO), Dan Frey, explained that of the total cat load experienced in Q3 2022, the majority, or $326 million related to hurricane Ian.

“We hold ourselves accountable for managing our cat exposures over time and Ian is another illustration of our industry leading expertise,” said Frey. “Based on available industry estimates for Ian, Travelers’ share of losses looks to be well below our weighted average market share in the affected states.”

He went on to explain that the investments the firm has made in talent, tech, and sophisticated peril-by-peril modelling, “are paying off in terms of risk selection, pricing, segmentation, risk mitigation, and our industry leading claim response capabilities.”

Interestingly, Frey also provided an update on the insurer’s year-to-date cat losses and how this impacts Travelers reinsurance protection.

Through September 30th, 2022, Travelers has accumulated $1.4 billion of qualifying losses for the aggregate retention of $2 billion on its property cat XoL reinsurance treaty.

As of the end of June 2022, this figure was $935 million, meaning that qualifying losses in Q3 eroded an additional $465 million of Travelers’ aggregate retention for this programme. So, it’s going to take a further $600 million+ of qualifying losses in Q4 before Travelers makes any reinsurance recoveries under its property cat XoL treaty.

As a reminder, Travelers exhausted its aggregate reinsurance in 2021 after recovering $350 million for the full-year. In response, at the January 1st, 2022, reinsurance renewals, the firm announced reductions to its aggregate catastrophe program for this year, alongside the expansion of its corporate catastrophe XoL reinsurance treaty.

Regarding the aggregate protection, the adjustments made to the 2022 programme mean that it takes more losses to attach, with each loss needing to be larger. And, with the amount of cover coming down, year-on-year, the protection also requires more loss activity to attach.

With the key 1/1 renewals fast-approaching, reinsurance and specifically pricing is a hot topic, and was addressed by management during the Travelers earnings call.

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

For Travelers, explained Frey, there’s two reasons why they expect to be less impacted than others in the marketplace.

“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,” said Frey.

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

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