Issuance of the Stratosphere Re Ltd. (Series 2020-1) catastrophe bond has now been successfully completed without upsizing at $100 million but at the lowest end of pricing, offering an efficient source of tail-risk protection to the largest ILS fund manager in the market Nephila Capital.
The Stratosphere Re cat bond, which launched to investors earlier in January, is an innovative transaction, both in terms of the tail level risks it brings to market, but also in the coverage it provides to the beneficiary.
The Stratosphere Re cat bond is designed to provide reinsurance protection for some of the tail risks that program fronting provider State National retains through its work with Nephila Capital, over and above the level of risk that Nephila’s ILS reinsurers typically collateralise on the fronted balance-sheet.
The deal launched at $100 million in size and with the issuance now completed we understand this did not increase.
So Stratosphere Re will provide a $100 million source of annual aggregate indemnity reinsurance protection for the tail risk created by Nephila’s managing general agent fronted insurance business, covering tail losses from named storms, earthquakes, winter storms and severe thunderstorms.
As we explained in another article on this novel cat bond transaction, in order to be triggered and investors principal lost there have to be at least two industry loss events of $5 billion or more in an annual risk period and subsequent qualifying events must also cause that level of industry impact before indemnity losses would accumulate for the transaction.
The attachment point will sit at $2.35 billion of losses, above the level of losses collateralized by Nephila’s reinsurance vehicles, which as we explained is estimated to require losses representing between 15%-25% of Nephila’s total assets under management in order for the transaction to be triggered.
Bermuda-based special purpose insurer Stratosphere Re Ltd. has now issued a single $100 million tranche of Class A notes that have been sold to cat bond investors in order to collateralise the necessary reinsurance agreements.
The direct beneficiary and ceding reinsurance party to the cat bond deal is Markel Bermuda (a unit of Nephila’s owner Markel Corporation), who will enter into reinsurance agreements with Stratosphere Re and in turn with the also Markel owned program fronting specialist State National.
Protection will be afforded through an indemnity trigger, on an annual aggregate basis across the three year term, providing reinsurance protection for a range of U.S. natural catastrophe perils, including named storms, earthquakes, winter storms and severe thunderstorms.
In order to qualify under the terms of the Strateosphere Re cat bond, any loss events must be above $5 billion on an industry basis and there have to be two of these losses in a an annual risk period for the notes to actually be eroded.
Which makes this a kind of second event cover, providing indemnity reinsurance for tail end risks from large industry loss events.
The $100 million of Stratosphere Re 2020-1 Class A notes, which have an initial expected loss of 0.115%, were initially offered to investors with coupon guidance in a range from 2.75% to 3.25%.
The notes finally priced at the low-end of that guidance range, to offer investors a 2.75% coupon and a very healthy multiple for the assumption of this tail risk.
That’s a roughly 8% decline in pricing from the mid-point of guidance, which is aligned with other recent cat bonds. But as we said, the multiple here is exceptionally healthy for what is a remote risk.
This Stratosphere Re cat bond is a clever and innovative way to add capital elasticity 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.
In supporting the growing pool of retained tail risk that fronting partner State National inherits through Nephila’s expansive MGA sourced primary risk channels using a catastrophe bond as a form of risk capital, Nephila Capital is again showing that it recognises the opportunities to deliver more efficiency into its business model, managing risk and capital in harmony to generate increased growth potential.
This deal makes the capital go further, reducing tail risk pressure on State National’s balance-sheet and ensuring it can do more as Nephila’s program focused risk origination strategy grows further over time. That’s what we mean by capital elasticity, it allows you to leverage efficient capital from ILS investors to do more with your own.
Fitch Ratings gave the $100 million of Stratosphere Re Ltd. Series 2020-1 Class A notes due February 7th 2023 a rating of ‘BBBsf’.
It’s unusual for any cat bond to be rated these days, but it can help to broaden the range of investors that can allocate to such a deal.