Gator Re situation worsens, offers to buy at-risk cat bond still emerge

by Artemis on December 18, 2014

The ongoing situation surrounding Florida primary insurer American Strategic Insurance’s Gator Re Ltd. catastrophe bond has deteriorated further, as mounting catastrophe losses have risen further towards the cat bond’s attachment point.

According to investors the latest update on qualifying losses suffered by American Strategic Insurance shows that a further rise is likely and that the erosion of the retention layer beneath the Gator Re indemnity trigger is worse than initially thought.

Investors at first reported that qualifying aggregate losses had reached an estimated level of $113m, around three-quarters of the way to the $150m trigger for the annual aggregate ‘section b’ coverage provided by Gator Re. Latest reports suggest that this is set to rise further to $135.5m, taking the erosion of the retained layer to just over 90%.

The latest update is again based on estimated incurred losses, not paid, so these numbers will have to be firmed up, but of course that leaves room for a further increase just as much as a fall in the estimate. The increase to $135.5m is still based on qualifying losses incurred up to the end of October, which still leaves two months of losses to be added to any total erosion.

According to sources bids continue to come in for the at-risk Gator Re catastrophe bond notes, showing that investors are willing to take on the risk of it triggering and some clearly believe that it is likely to survive this year. As we reported almost two weeks ago bids were being sought at around the 89 to 90 market, showing the market had discounted the notes by 10% for the additional risk.

We understand that some offers to buy the Gator Re notes continue to emerge at around the 90 mark. Investors are willing to speculate on the cat bond’s ability to survive the rest of this year to the 31st December when a new risk period begins.

The U.S. severe thunderstorm and tornado season in 2014 is on track to become one of the least active on record, as we reported recently. That could be the saving grace for the Gator Re cat bond that helps it to get to the end of the risk period without qualifying losses fully eroding the retention and reaching the trigger attachment point.

However, it must be noted that had the 2014 U.S. tornado, hail and severe thunderstorm season been more severe, perhaps even average, it looks increasingly likely that Gator Re would have struggled to survive it. What does it say for the underlying structure when a cat bond paying investors a coupon of only 6.5% gets so close to being triggered by one of the least severe thunderstorm and tornado seasons on record?

Of course we realise that without the full details of the losses suffered such a comment perhaps seems a little facetious, however it is one of the first question’s to come up in discussions with the ILS investors we’ve spoken to.

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Bob Medeiros December 23, 2014 at 6:56 pm

Steve, I think your last observation is a good one. I suspect the concern in the ILS market is not an accurately modeled big event but an inaccurately modeled small event which could unexpectedly tie up their funds and/or trigger a bond.

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