The Gator Re Ltd. catastrophe bond transaction is once again getting closer to attaching, as the latest loss report to the end of July shows that the aggregate retention layer beneath the cat bond’s trigger has been almost 85% eroded by severe thunderstorm losses.
The aggregate reinsurance protection ‘section b’ layer of the Gator Re catastrophe bond, which was issued back in 2014, has seen losses steadily accumulate from U.S. severe thunderstorm activity in 2016. Now those losses have reached 85% of the way to the attachment point for this section and with the U.S. severe thunderstorm season still ongoing the risk to investors is rising again.
The Gator Re cat bond is sponsored by Florida primary insurance firm American Strategic Insurance, providing it with collateralised reinsurance for property catastrophe risks, covering U.S. named storms and severe thunderstorm risks.
The aggregate ‘section b’ layer of the Gator Re cat bond provides the sponsor with $200m of reinsurance protection above a retention layer. The aggregate retention is structured on a maximum loss per event basis, which was $40m at launch (we’re unsure if this has changed at subsequent resets).
This aggregate retention layer that is being eroded by qualifying catastrophe loss events, specifically in 2016 severe thunderstorm and hail storm losses with a significant proportion being in Texas where risk is concentrated for the Gator Re cat bond, sources said. The aggregate section coverage is solely exposed to losses from severe thunderstorm events, and this year has seen some large losses from that peril.
At the end of April 2016 the qualifying losses from severe thunderstorm risks amounted to almost $122m, which is 70% of the way to the reset attachment point of $175m. At the next update by the end of June 2016, we understand that the loss estimate had risen again, as further severe thunderstorm and hail events pushed the figure up to $133.5m, which is 76% of the way to triggering.
Now, market sources have told Artemis that qualifying losses have risen again, now reaching $148.6m, as losses from thunderstorms, tornadoes and hail events continued to impact the insurers portfolio that is covered under the terms of this cat bond.
So that means that estimated losses have now made their way to almost 85% of the attachment point, 84.91% to be precise, increasing the risk level for the section b layer of the Gator Re cat bond.
It would not take an enormous severe thunderstorm, tornado or hail event now to tip the Gator Re cat bond over the trigger point, it would seem. The peak season for severe thunderstorm and convective weather is typically considered to slow from July/August, however tornadoes can occur right through the year and hail or severe convective storms are also seen throughout winter in southern states, meaning Gator Re cannot be assumed safe yet.
The reinsurance risk period for the Gator Re cat bond runs to the end of the year, with maturity due for this catastrophe bond at the end of 2016. So that gives almost four more months for losses to accumulate towards the trigger point, which may be a risk some investors do not want to take at this point in the year and with qualifying losses at 85% of the trigger.
So it’s possible that some trading could take place this week, as investors may look to offload the Gator Re cat bond in order to minimise risk to their portfolios.
The latest loss report only came out in recent days and no trading has been seen so far, based on Finra’s TRACE data, but we’d expect the secondary price to drop a little further now and for some trades to perhaps be seen in the coming days as investors absorb the latest loss information.
We’ll keep you updated as information emerges.