The recently issued $100 million Stratosphere Re Ltd. (Series 2020-1) catastrophe bond that provides a source of reinsurance to cover tail risks generated by Nephila Capital’s fronted insurance business is seen as a “logical development” by Markel Co-CEO Richie Whitt, who said the structure will allow his company to continue growing its ILS operations.
Speaking during the Markel quarterly earnings call this week, Co-CEO Richie Whitt explained the rationale for the transaction and how it creates an efficient route to the capital markets through which the company can share these tail risks, adding room for expansion of this fronted, ILS funded business.
As we explained recently, the Stratosphere Re catastrophe bond entered “rarefied air” as an investment grade series of notes, something particularly unusual to see in the insurance-linked securities (ILS) market.
The motive behind the transaction was clear, to enable more fronted primary insurance business to be underwritten and channelled to Nephila’s funds and capital, by ceding away some of the tail risks that accumulate to get them off the balance-sheet of fronting provider and Markel stable-mate State National.
Whitt discussed this strategic move during the earnings call, calling the Stratosphere Re cat bond transaction a “test case deal”, suggesting it could be the first of many.
“We think this is a logical development that improves the investment portfolios for the buyers of these securities, while protecting the Markel balance sheet,” Whitt explained, saying that “It aligns perfectly with our goal of creating solutions that effectively and efficiently connect the right risk with the right capital.”
He went on later to explain, “Stratosphere does a number of things. First, we talked about connecting the right risk to the right capital, remote tail risk is an existential risk to insurance companies. You cannot keep too much of it on your balance sheets. But it’s a diversifying risk in the broader, deeper capital markets.
“So, what we have done is created a transaction, that hopefully others will think about doing and we know we will continue to do, to take some of that remote tail risk and move it into the broader, deeper financial markets.”
It’s all about creating elasticity within the business model of rated fronting for Nephila’s sourcing of primary catastrophe exposed insurance business, adding flexibility and efficiency to both the fronting partner’s balance-sheet and Nephila, while benefiting the ILS funds and investors with the ability to do more.
Whitt said, “What that allows us to do is continue to grow our ILS operations. Eventually, we would get to a point where we could not warehouse any more of that remote tail risk on Markel’s balance sheet. By working to open up this market and move that risk into the broader financial markets, it gives us room to continue to grow our ILS operations.
“So we’re really excited about it. It was dipping a toe in the water, but we think the potential is huge as we go forward.”