Swiss Re Insurance-Linked Fund Management

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Gator Re cat bond secondary pricing recovers some ground


The Gator Re Ltd. catastrophe bond transaction, issued for ceding Florida primary insurance firm American Strategic Insurance in 2014, which has again seen its aggregate retention partially eroded due to qualifying losses from severe thunderstorms has recovered some of its lost ground in the secondary market.

Investors said recently that qualifying losses were mounting against the aggregate reinsurance coverage that Gator Re provides, with sponsoring insurer American Strategic having notified those invested in the cat bond that qualifying losses neared almost $122m by the end of April 2016.

The aggregate ‘section b’ layer of the Gator Re cat bond provides American Strategic 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 has been eroded by qualifying catastrophe loss events, specifically this years severe thunderstorm and hail storm losses largely in Texas. The aggregate section coverage is solely exposed to losses from severe thunderstorm events.

As a result the price of the Gator Re cat bonds had dropped in the secondary market, with FINRA’s Trace system showing that the Gator Re notes traded at just 76 cents on the dollar on June 13th, dropping from 97 at the previous recorded trade in the Trace system.

Some of that lost ground has been recovered now, with trades of the Gator Re notes recorded at 80 cents on the 20th June and most recently 82.5 on the 1st of July.

This shows investor confidence perhaps recovering in the cat bond as the peak of the U.S. severe thunderstorm season passes and the potential for additional losses to erode the aggregate retention declining slightly as a result.

The Gator Re cat bond is by no means safe though, with almost 70% of the retention beneath the attachment point said to have been eroded. But clearly some investors have been willing to buy the notes at the reduced price, taking on the risk of triggering and hoping to profit by a recovery of the price, likely seeking to hold the cat bond to maturity.

Secondary cat bond trading desks have the notes priced for bids and offers of anything between 80 to 85, according to the latest pricing sheets we’ve seen.

But, with over 5 months of the annual risk period left to run and losses 70% of the way to the attachment point, the Gator Re catastrophe bond cannot be considered safe yet. However this shows the functioning of the market and the diverse range of investors, with some willing to trade out of the position at a reduced price, to protect their portfolios, while others are willing to buy in and hope for a full recovery.

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