Gator Re cat bond trades, but threat may grow with new thunderstorms

by Artemis on December 29, 2014

Florida primary insurer American Strategic Insurance’s Gator Re Ltd. catastrophe bond saw some trading activity earlier this month despite the threat of losses, but a recent thunderstorm and tornado system may produce additional qualifying losses.

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 the Gator Re cat bond. More recent reports then suggested that the figure was set to rise further to $135.5m, taking the erosion of the retained layer to just over 90%.

As we wrote on the 18th December, bids continued to be encouraged at a level discounting the Gator Re notes by around 10%. However it’s now clear from FINRA data that $2.5m of the Gator Re notes actually traded on the 19th December at 79c, which discounts the notes by 20%, suggesting investor confidence is declining in the notes ability to survive this risk period.

In fact, recent severe thunderstorm and tornadoes which struck the U.S. south and southeast in the week before Christmas may actually have increased American Strategic’s losses and could result in further creep of the qualifying losses and further erosion of the retained layer beneath Gator Re.

According to the Storm Prediction Center there were 16 tornado reports, 18 of hail and 63 of damaging straight-line winds in an outbreak of severe weather from the 22nd to the 24th of December. The outbreak included an EF3 tornado which struck Columbia, Mississippi causing significant damage as well as severe hail, flooding rain and damaging winds elsewhere across the southern and south-eastern U.S. The regions affected by the storm are largely in areas where American Strategic has some policies in force.

Aon Benfield’s Impact Forecasting unit said that the scope of damage from this severe storm outbreak was likely to take economic losses above $100m. If that is the case then we’d expect to see some additional loss creep for American Strategic and as a result likely for Gator Re too.

Impact Forecasting said:

A powerful December storm system spawned more than a dozen tornado touchdowns, large hail, damaging straight-line winds, flash flooding, and accumulating snowfall across the Eastern U.S. this week. At least four people were killed and more than 50 others were injured.

Interestingly, the definition of a severe thunderstorm for the Gator Re cat bond does leave some room for interpretation, with the cedent responsible for defining which events qualify and which don’t. That makes the reinsurance protection that the cat bond provides as broad and flexible as possible for the cedent.

A severe thunderstorm is described as below for the purpose of the Gator Re offering according to documentation Artemis has seen:

Any wind and thunderstorm event reasonably identified by the Ceding Insurer as such and includes the perils of lightning, wind, hail and/or tornado, among others.

All damage resulting from these perils can be included under the severe thunderstorm definition, unless it is explicitly excluded under the terms of the policies.

The definition almost leaves it open to American Strategic to define what it concludes to be a severe thunderstorm event and what it should receive reinsurance protection for. We’d imagine that risks such as flooding rainfall caused by thunderstorm outbreaks could also be included as qualifying losses if American Strategic felt it should be covered from them under the terms of the Gator Re cat bond.

The relatively loose definition of a severe thunderstorm, with no reporting agency required to validate that an event has actually occurred, may go some way to explaining how Gator Re has suffered such a high amount of qualifying losses in what has actually been one of the most benign U.S. tornado seasons on record.

With the reported loss estimates that took the erosion of the retained layer up to 90% based on losses up to the end of October leaving two months left to run, as well as IBNR losses to be firmed up and now this latest spell of severe thunderstorm and tornadic weather, it is beginning to look more likely that Gator Re could hit the trigger before the end of the year.

The current annual loss occurrence period ends on the 31st December 2014, but it could be some weeks before a final ultimate net loss for the Section B peril of severe thunderstorm over the duration of 2014 is reported. If Gator Re does indeed breach the trigger, investors would only face a loss of principal for losses above the $150m attachment point, so any loss would likely be minimal.

After the recent tornadoes and thunderstorms it looks like the fate of Gator Re will go down to the wire and investors will have to wait until final loss estimates for the full-year are released by American Strategic. As a result it may become harder, or even impossible, to trade the Gator Re notes and we could even see a further decline in secondary market prices.

Read our other coverage on the threat to Gator Re, most recent article first:

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

Gator Re cat bond secondary price drops on eroded retention layer.

American Strategic’s losses erode retention beneath Gator Re cat bond.

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