Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Gator Re losses rise again, eroding full $35m of retained principal


It now appears that the full $35 million of investor principal retained from the triggered Gator Re Ltd. catastrophe bond will be paid out to sponsoring insurer American Strategic Insurance Corp., as the latest estimate of qualifying losses has moved more than that amount above the attachment point now.

Artemis can reveal that the latest loss estimate for qualifying claims covered by the Gator Re cat bond has been reported as just over $213.6 million by American Strategic Insurance, which as the attachment point was $175 million actually means that the retention of principal may have been underestimated.

As claims reports rose and it became clear that a loss was due on Gator Re, the sponsor elected to only extend and retain $35 million of the collateral principal, returning the rest from the $200 million deal to investors in the cat bond.

With reported claims now $38.6 million above the attachment point, as the adverse development of prior severe thunderstorm losses continues, it looks like American Strategic could actually have retained more of the principal to pay for some of these additional claims.

The latest loss estimate of $213.6 million is just the most recent, delivered in April we understand from sources, and so it’s even possible that this figure could keep rising further. But with the full $35 million of retained principal now set to be paid out to the sponsor, it’s expected that the extension of the Gator Re cat bond will now be cancelled and the transaction allowed to mature finally.

Sponsor American Strategic had already reported a $29.5 million reinsurance recovery under the Gator Re cat bond protection, so leaving $5.5 million of the retained principal still available. Now it seems that additional $5.5 million will also be paid out to the insurer.

As a result of this news we understand that some broker pricing sheets now list the cat bond as a total loss, with pricing of bids set at zero indicating the total loss of the remaining principal.

But it could have been more, it now turns out, which demonstrates just how tricky it can be determining final loss estimates under indemnity reinsurance contracts, particularly for an aggregation of severe thunderstorm events and also that the sponsor likely elected to make a decision on the retained principal early to get a faster payout and to give investors greater certainty in their final maximum loss.

The Gator Re cat bond notes were extended again recently, with maturity moved to the 9th May 2017. It seems unlikely a further extension will be required, now that the retained principal is set to be exhausted, drawing a line under the loss for investors in the catastrophe bond.

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