What Travelers Earnings Says About the U.S. Catastrophe Market

Changes in the catastrophe reinsurance program for the second largest U.S. commercial carrier reveals two important factors about the current market: reinsurers are on the ropes in terms of price and hail losses remain a nagging issue in a catastrophe light year.

“I would assume that all national or international carriers that are large reinsurance buyers have the upper hand in negotiations,” says Meyer Shields, an analyst with Keefe, Bruyette & Woods in Baltimore. “[Travelers] approach is always to buy the most amount of cover for the least amount of dollars, but it really shows that the bigger factor for many buyers is the soft market in reinsurance.”

During its fourth quarter earnings call on Thursday, the Travelers Insurance announced that it had consolidated its corporate catastrophe excess-excess of loss reinsurance treaty into a single program.

According to the company’s presentation,  the company’s renewal covers accumulation of certain property losses arising from one or more multiple occurrences: 75% (1.5 billion of qualifying losses covered by the treaty and 25% ($500 million) of qualifying losses retained by the company part of $2 billion excess of $3 billion. Qualifying losses for each occurrence are after a $100 million deductible.

The change in cover was first cited by London-based Insurance Insider.

“We have taken advantage of the recent evolution in aggregate cat reinsurance products to restructure our cat cover, further focusing on severe events that on a single or cumulative basis could impact capital,” said Jay Benet, Traveler’s CFO. “As an aggregate cover, there is a single limit with no reinstatement provisions, the cost is essentially the same as the previous program, but it provides greater potential recovery after the higher retention.”

KBW’s Shields adds that soft market in catastrophe reinsurance allowed Travelers to achieve a strategic goal instead of simply getting an incremental cost savings.

“What this does is allow Travelers to get significantly more cover while making the earnings more predictable,” Shields said. “Under this new program, it will take some sizable losses before it affects the bottom line.”

Catastrophe losses were light for Travelers in the fourth quarter, but severe storm and hail losses continued to nag the company.

Despite full year net income up 12% and a generated return on equity of 14.6% — along with a one percent improvement in its combined ratio — Travelers also announced an increase in estimated losses “related to certain wind and hail storms.”

In fact, while Traveler’s combined ratio improved 0.8 points to 89.0% in 2014 and included a higher net favorable prior year reserve development (0.2 points), the increase in the combined ratio was partially offset by higher catastrophe losses (0.4 points).

“Catastrophe losses were primarily due to a wind and hail storm in the Midwest region of the United States, as well as increases in estimated losses related to certain wind and hail storms that occurred in the second quarter,” the carrier said in the earnings statement.

Shields explained that the hail losses “stands out because there was so little catastrophe activity” during the period, he sees the peril a much more significant issue for other insurers.

“You will see more impact [from hail] on the Bermuda insurers,” he said. “Crop hail was a little more iffy for the in 2014.


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