Stratosphere Re’s cat bond price drops to cover $ 100 million of Nephila’s tail risk


The issuance of the Stratosphere Re Ltd. catastrophe bond. (Series 2020-1) has now been successfully completed with no increase to $ 100 million but at the lower end of the price, providing an effective source of tail risk protection for the largest ILS fund manager in the market. Nephila Capital.

The Stratosphere Re cat bond, which was launched to investors earlier in January, is an innovative transaction, both in terms of the tail risks it brings to the market, but also in terms of the cover it offers to the beneficiary. .

The Stratosphere Re cat bond is designed to provide reinsurance protection for some of the extreme risks that the State National program coverage provider retains through its work with Nephila Capital, beyond the level of risk that Nephila’s ILS reinsurers guarantee. usually on the coverage balance sheet. .

The deal kicked off at $ 100 million and with the show now over, we understand that has not increased.

Stratosphere Re will therefore provide a source of $ 100 million of aggregate annual indemnity reinsurance protection for the extreme risk created by the management of Nephila’s insurance business, covering residual losses due to named storms, earthquakes. land, winter storms and severe thunderstorms.

As we explained in another article on this new cat bond transaction, in order for it to be triggered and investor capital to lose, there must be at least two industry loss events of $ 5 billion. of dollars or more during an annual risk period and subsequent qualifying events must also result in that level of impact on the industry before compensation losses accumulate for the transaction.

The attachment point will be at $ 2.35 billion in losses, above the level of losses guaranteed by Nephila’s reinsurance vehicles, which, as we have explained, would require losses of between 15 and 25. % of total assets under management of Nephila for the transaction to be triggered.

Bermuda-based ad hoc insurer Stratosphere Re Ltd. has now issued a one-time $ 100 million Class A Notes which have been sold to Class Bond investors to secure the necessary reinsurance arrangements.

The direct beneficiary and the ceding reinsurance part of the cat bond agreement is Markel Bermuda (a unit of the owner of Nephila, Markel Corporation), who will enter into reinsurance agreements with Stratosphere Re and in turn with the program specialist owned also in Markel, State National.

Protection will be provided by an indemnity trigger, on an aggregate annual basis over the three-year term, providing reinsurance protection for a range of natural disaster risks in the United States, including storms, earthquakes , winter storms and severe thunderstorms.

To qualify under the Strateosphere Re Catastrophic Obligation, any loss event must be greater than $ 5 billion on a sector basis and there must be two such losses in an annual risk period for the losses to occur. notes are actually eroded.

This makes it a sort of second event cover, providing indemnity reinsurance for extreme risks associated with large loss events in the industry.

The $ 100 million Stratosphere Re 2020-1 Class A Notes, which have an expected initial loss of 0.115%, were initially offered to investors with coupon forecasts in a range of 2.75% to 3.25% .

The Notes were ultimately priced at the lower end of this advice range, to offer investors a 2.75% coupon and a very healthy multiple for assuming this tail risk.

This is about an 8% drop in prices from the midpoint forecast, which is in line with other recent cat bonds. But as we said, the multiple here is exceptionally healthy in terms of remote risk.

This Stratosphere Re Catastrophic Bond is a smart and innovative way to add capital elasticity to the overall structure of Nephila’s core risk sourcing business model, while ensuring tail risk does not escalate into risk. national state balance sheet.

By supporting the growing pool of retained residual risk that the front partner State National inherits through Nephila’s primary risk channels from MGA using catastrophe bond as a form of venture capital, Nephila Capital is once again showing that it recognizes the opportunities to offer more efficiency in its business model, managing risk and capital in harmony to generate increased growth potential.

The deal allows capital to go further, reducing tail risk pressure on the nation’s balance sheet and ensuring that it can do more as Nephila’s program-driven risk origination strategy grows. develops more over time. This is what we mean by elasticity of capital, it allows you to leverage the efficient capital of ILS investors to do more with yours.

Fitch Ratings assigned to Stratosphere Re Ltd. $ 100 million notes. Series 2020-1 Class A maturing on February 7, 2023 with a rating of “BBBsf”.

These days, it is unusual for a catastrophic bond to be rated, but it can help broaden the range of investors who can devote themselves to such a transaction.

You can find out all about the Stratosphere Re Ltd. catastrophe bond. (Series 2020-1) in our complete transaction directory.

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