Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Gator Re cat bond secondary price drops on eroded retention layer


According to broker pricing sheets, the secondary pricing mark for Florida primary insurer American Strategic Insurance’s Gator Re Ltd. catastrophe bond has declined, as the market absorbs the fact that as much as 75% of the retention beneath the trigger is eroded.

When we covered the fact that the aggregate ‘section b’ layer of the cat bond notes, that provides American Strategic with $200m of protection above a $150m retention layer, was seeing the retention eroded the bond was priced for bids of around 103.6 and offers of 104.6.

Today, after the market has absorbed the fact that with a reduced retention layer beneath the cat bond trigger it is effectively more at risk, we understand that bids are now being encouraged at around the 89 mark with offers at 99. That spread between bid and offer perhaps reflects the uncertainty surrounding the bonds status.

The $150m of aggregate retention below ‘section b’ 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.

However, the annual loss occurrence period ends on the 31st December, so leaving only a month left to run and with the fact that the severe thunderstorm season is well passed its peak for losses investors we’ve spoken with this week suggest that they feel the Gator Re cat bond is likely to survive to the next risk period.

The change in pricing does not necessarily mean that much trading has happened, in fact we wouldn’t be surprised if most investors would have held the bond. It likely reflects the level that some speculative buyers have been seeking to purchase the bond, in the hope that those holding it might relinquish their positions.

Whether the Gator Re cat bond makes it to year-end without reaching the trigger or not, what this episode does show is that with a particularly active severe thunderstorm season this bond could begin to suffer losses. This year has not been the most active of late, which makes us wonder how far through the year this section of the notes would get without suffering a loss if we saw a repeat of a very active thunderstorm and tornado year like 2011.

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