Travelers targets hard reinsurance market returns via Fidelis quota share

Travelers executives revealed today that, as part of the investment the giant US insurer made into Fidelis Insurance Holdings, the arrangement also featured a relatively significant 20% quota share reinsurance deal, that will see Travelers able to benefit from hard reinsurance market returns.

Back around the middle of 2021, it was announced that Travelers invested an undisclosed amount into Fidelis, which the recipient termed a “minority investment.”

All that was disclosed at the time, was that Travelers had joined Fidelis’ shareholder panel with the investment.

But today, Travelers CFO Dan Frey gave some details on an additional arrangement between the pair, a quota share reinsurance deal that will see Travelers sharing in Fidelis’ premiums and also losses.

“In 2021, we took a minority ownership stake in Fidelis effective January 1st 2023,” Frey explained.

Adding that, “We have separately entered into an agreement with Fidelis whereby Travelers will take a 20% quota share on policies issued by Fidelis with effective dates in 2023.”

So Travelers will share in 20% of the premiums and also losses of Fidelis’ business, which is focused on areas of the market that historically Travelers has not had a significant footprint itself.

But with the opportunity in reinsurance and specialty insurance now accentuated by the hardening of rates and pricing, Frey sees the Fidelis relationship as a critical way for Travelers to tap into areas of the market is has been less focused on, leveraging the underwriting expertise of Fidelis.

“The market for Fidelis products is probably as favourable as it has been in 20 years or so,” Frey said.

“This quota share arrangement allows us to participate in the hard market, while also accelerating our understanding of this marketplace,” he added.

He went on to explain that, while the quota share is both “strategically valuable” and expected to be “accretive to earnings”, it is not expected to have a significant impact on Travelers consolidated financial results.

He explained that, “Our portion of net written premiums from Fidelis is expected to be around $550 to $600 million for the full-year and those premiums will be reflected within the international results of business insurance.”

That’s a relatively significant opportunity though, as up to $600 million of international specialty insurance and reinsurance premiums could be very profitable for Travelers, in years where Fidelis’ underwriting is profitable.

Travelers also has some protection baked into the quota share reinsurance arrangement with Fidelis, CFO Frey said.

“Detailed terms of the quota share have not been disclosed, but we can share that there’s a loss ratio cap to ensure that even a worst case underwriting scenario is boxed to a very manageable impact on Travelers,” Frey explained.

Fidelis got its investment, plus quota share support, which has been a key lever for its scaling up towards the recent split deal into a balance-sheet entity and the Fidelis MGU.

Travelers has access to global specialty insurance and reinsurance market returns through the quota share, with an aligned relationship in place thanks to the investment as well.

In the current hard reinsurance market, that’s a great way for Travelers to add a little more diversification, while it sources the returns available in reinsurance, without overexposing its own balance-sheet, or straying from its own strategy.