Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

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


One of this year’s first time catastrophe bond sponsors, Florida-headquartered primary American Strategic Insurance, has reported that slowly mounting catastrophe losses are now rising towards the attachment point of its Gator Re Ltd. cat bond.

A loss report has been published, according to investor sources, that shows that qualifying losses are now building up against the aggregate reinsurance coverage that Gator Re provides. The cat bond provides both per-occurrence and aggregate coverage, in a novel two section structure on a shared limit basis.

The aggregate ‘section b’ layer of the notes provides American Strategic with $200m of protection above a $150m retention layer. The $150m of aggregate retention is structured on a maximum loss per event basis to an aggregate of $40m.

It is this aggregate retention layer that is becoming increasingly eroded by qualifying catastrophe loss events that have occurred since the deal’s issuance in March. The aggregate section coverage is solely exposed to losses from severe thunderstorm events.

According to investors the qualifying aggregate losses have now reached an estimated level of $113m, which is around three-quarters of the way to the $150m trigger for the annual aggregate section b coverage. The annual loss occurrence period ends on the 31st December and this estimate is said to be just to the end of October, meaning that there is two full months during which losses could still qualify.

However, the severe thunderstorm season is typically not expected to have a huge impact in terms of losses at during the last two months of the year, so for the deal to add another $37m of qualifying losses to reach the trigger, after which any additional losses could reduce the principal, seems unlikely at this time.

Perhaps more noteworthy is the fact that 2014 has not really been seen as a particularly bad year in terms of severe thunderstorm losses, across the course of the year. Also worth noting is the fact that when the cat bond launched, the contribution to the expected loss of the whole deal from ‘section b’ was said to be just 15.5%.

That means investors may have been a little surprised to see this deal’s qualifying losses gathering pace throughout the year. However it is perhaps explained by the fact that there is no per-qualifying event deductible on the aggregate protection, so any loss can count up to the maximum loss specified.

It seems unlikely to us that at this late stage of the year, with severe thunderstorm losses not expected to be too concerning through November and December typically, that the deal will reach the attachment point. This is a good example of how investors are kept appraised of the progress of a catastrophe bond throughout the year, through these monthly loss reports, which is particularly important where aggregate structures are involved as losses can mount suddenly.

It will be interesting to see how the Gator Re cat bond coped in a much more damaging severe thunderstorm season. So the one thing this loss report could do is stimulate some investors to offload their positions in the secondary market.

According to pricing sheets, Gator Re notes were priced well above par at bids of 103.6 and up, offers of 104.6, at the end of last week. It will be interesting to see whether the latest loss report from American Strategic, which was distributed to investors this week, makes any change to the cat bond’s secondary pricing.

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