Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Gator Re risk rising, as cat bond retention eroded again by storms


Once again, Florida primary insurance firm American Strategic Insurance’s Gator Re Ltd. catastrophe bond transaction is becoming more risky, as the aggregate retention layer beneath the cat bond’s trigger has been partially eroded due to qualifying losses from severe thunderstorms.

Insurance-linked securities (ILS) investors will be feeling as if they’ve been here before, as the Gator Re cat bond comes under threat once again in its 2016 annual risk period. Two years ago, the Gator Re cat bond saw this retention layer eroded, due to qualifying storm losses, effectively raising the risk and reducing the attachment probability over the remainder of the annual risk period.

The bond survived in 2014, but once again in 2016 investors have said that qualifying losses are now building up against the aggregate reinsurance coverage that Gator Re provides, with sponsoring insurer American Strategic notifying those invested in the cat bond that qualifying losses amounted to 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).

It is this aggregate retention layer that has once again become eroded by qualifying catastrophe loss events, specifically in 2016 severe thunderstorm and hail storm losses largely in Texas we understand. The aggregate section coverage is solely exposed to losses from severe thunderstorm events.

The retention layer has been updated at reset to $175m we understand, part of growth and adjustment calculations to the deal, so actually the Gator Re cat bond is a little less risky than it was in 2014, when the retention layer was lower at an initial $150m in size. But with qualifying losses now at almost $122m already this year, that means the losses are 70% of the way to the attachment point.

With attachment much closer and therefore the attachment probability of the Gator Re cat bond notes now much higher for the remainder of the 2016 risk period, the Gator Re notes have now traded at a lower price.

According to FINRA’s Trace data, the Gator Re catastrophe bond traded most recently on the 13th June at just 76 cents on the dollar, dropping from 97 at the last recorded trade in the Trace system.

So that’s almost a 25% discount on the notes and the trade shows one investor concerned enough by the aggregating losses suffered by American Strategic to sell the notes, while another was willing to buy, in the hope of holding to the end of the risk period and profiting from any rebound in price.

Of course, the fact losses are qualifying is no surprise after this spring’s storms in Texas and also across the southeast U.S. states. It’s been one of the most severe hail seasons in recent years and the Gator Re cat bond is perhaps most exposed to a multiple storm year, due to the limit on loss per-storm, rather than any single large storm.

The peak of the southern severe thunderstorm should now just about have passed, but with losses 70% of the way to the attachment point investors in the Gator Re catastrophe bond cannot consider the position safe with over six months of the final annual risk period still left to run.

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