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Stratosphere Re Ltd. (Series 2020-1)

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Stratosphere Re Ltd. (Series 2020-1) – At a glance:

  • Issuer: Stratosphere Re Ltd.
  • Cedent / sponsor: Markel Bermuda Limited (covering State National's tail risk from Nephila program)
  • Placement / structuring agent/s: Goldman Sachs is sole structuring agent and bookrunner.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: U.S. named storm, earthquake, winter storm, severe thunderstorm
  • Size: $100m
  • Trigger type: Indemnity
  • Ratings: Fitch Ratings: Class A - 'BBBsf'
  • Date of issue: Jan 2020

Stratosphere Re Ltd. (Series 2020-1) – Full details:

This Stratosphere Re Ltd. (Series 2020-1) is an interesting transaction as we understand it will benefit and provide protection for the portfolios of primary property insurance underwritten for the ILS funds of Nephila Capital.

Newly established Bermuda special purpose insurer Stratosphere Re Ltd. is planning to issue a single $100 million tranche of Class A notes that will be sold to investors to collateralise the necessary reinsurance agreements.

Acting as direct beneficiary and ceding reinsurance party to the cat bond deal is Markel Bermuda, who will enter into reinsurance agreements with Stratosphere Re and in turn with program fronting specialist State National, we understand.

This cat bond will cover some of the tail risks that State National retains through its work with Nephila, over and above the level of risk that Nephila’s ILS reinsurers typically collateralise on the fronted balance-sheet.

It seems, from the little we know so far, a clever and innovative way to add capital to the overall structure of Nephila’s primary risk-sourcing business model, while ensuring the tail risk doesn’t get out of hand on the State National balance-sheet.

We’re told that the currently $100 million of notes will provide their protection via an indemnity trigger, on an annual aggregate basis.

The reinsurance protection is for a range of U.S. natural catastrophe perils, including named storms, earthquakes, winter storms and severe thunderstorms.

The transactions will run across a three-year term and we understand that in order to qualify any loss events must be above $5 billion on an industry basis and there have to be two of these losses in a year for the notes to be able to be eroded.

As a result, it seems like this is a second event cover, providing indemnity reinsurance for large industry losses. Given the reach of Nephila’s large ILS portfolio and growing primary property insurance writings, this seems a prudent way to cover the tail risk associated with its activities.

The attachment is at $2.35 billion of losses and the exhaustion will be at $3.35 billion, with this cat bond expected to cover at least 10% of the layer of tail risk.

We’re told that the $100 million of Stratosphere Re 2020-1 Class A notes will have an initial attachment point of 0.185%, initial expected loss of 0.115% and are being offered to investors with coupon guidance in a range from 2.75% to 3.25%.

It’s a relatively remote risk, being the tail component of the State National and Nephila relationship business, but the multiple is high which should make it appealing to the cat bond investor base.

The Stratosphere Re cat bond notes are one of a very few cat bonds to have ever achieved an investment grade rating, having received a ‘BBBsf’ rating from Fitch.

Update 1:

The Stratosphere Re Ltd. (Series 2020-1) catastrophe bond did not upsize while marketing, settling as a $100 million offering of notes.

The pricing settled at the low-end of initial guidance, to offer investors a risk interest spread of 2.75%.

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