A very interesting new insurance-linked securities (ILS) transaction has been launched to investors we’re told, in the shape of a $100 million Stratosphere Re Ltd. (Series 2020-1) catastrophe bond that we’re told will provide a source of reinsurance to cover certain primary insurance tail risks that were underwritten by and for ILS fund manager Nephila Capital.
Nephila Capital is the largest ILS fund manager in the market and has expanded significantly into sourcing catastrophe and severe weather exposed primary property insurance business using a platform including managing general agencies (MGA’s), such as its own Velocity, and fronting provided by specialist State National.
As a result, there is a growing book of catastrophe exposed property insurance risk that needs some protection and with both Nephila and State National now part of the Markel Corporation stable, it’s perhaps unsurprising to see all three names mentioned in respect of a new catastrophe bond transaction.
From what we’ve learned so far, 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.
We’re told that the $100 million of Stratosphere Re 2020-1 Class A notes will have an 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.
This innovative use of a catastrophe bond to cover the tail risk held by State National from its work as program fronting insurance balance-sheet to Nephila Capital’s direct primary writings is an intriguing way for the overall business model to benefit from capital relief from the ILS market.
It’s also perhaps the latest sign of the value currently on offer to ceding companies in the catastrophe bond market, where pricing is making it a very attractive time for large firms to return to the market in search of reinsurance and retrocession.