State National: Alternative capital to drive fronting business demand

by Artemis on March 20, 2015

State National Companies, a provider of program services and fronting for insurance, reinsurance and ILS capital, expects the growing role of alternative capital markets in reinsurance to drive further demand for its fronting services.

Through State National’s program services business reinsurance capital providers can deploy their capacity through the firm’s admitted carriers which have ‘A’ ratings across 50 U.S. states. Effectively, State National allows insurance policies to be issued in its name and using its rated paper, while the capital providers reinsure the underlying risks.

Given the competitive and well-capitalised state of the traditional reinsurance market right now, capacity providers, both traditional and alternative, are looking for new ways to access property catastrophe business in the U.S.

Gaining access to business through a fronting insurer is one way to secure a new source of insurance business to reinsure, while at the same time securing the profits of this business for yourself (minus ceding fees paid to the front) as it’s not syndicated out to the reinsurance market. In this way fronting is also having a disintermediation effect on other reinsurance capacity providers as well.

State National sees reinsurance and ILS market trends driving further demand for its services.

“Increased capital in the property and casualty insurance market, including the increased role of alternative capital markets in reinsurance, and the growth of offshore reinsurance markets generally should drive demand for our services, as many of these firms do not have direct access to the U.S. market,” the firm explains.

The largest insurance-linked securities investment manager in the business, Nephila Capital, has already signed up to use State National to front for it in an agreement that gives the ILS manager the exclusive right to provide capital to back U.S. property catastrophe insurance with State National through 2015 and 2016.

The exclusivity of that arrangement is important, as it’s now clear that others in the ILS and alternative capital space are keen to establish similar relationships to access the same type of business.

The agreement allows Nephila to gain access to new reinsurance portfolios, by partnering with producers in the U.S. who can construct portfolios that are fronted by State National and ultimately reinsured by Nephila’s ILS capacity.

In this way it’s incremental business that perhaps wouldn’t have been as accessible through the traditional syndicated reinsurance programme participation approach.

The relationship works both ways as well, with State National reporting attractive fees earned from the agreement with Nephila.

“In 2015, we expect fees for Program Services to be in the range of $55 to $60 million. Included in this projection is our expectation of approximately $21 to $25 million in fees from Meadowbrook and Nephila, each of which individually contribute $10 to $13 million in fees,” it disclosed.

State National wrote gross written premiums of $910m in 2014, up from $691m in 2013, in its program services division. It retained zero of that risk for itself, ceding it out to partners and capital providers instead, which earned it ceding fees of $45.7m in 2014, up from $32.9m in 2013.

State National prides itself in being the only significant provider of dedicated fronting services in the insurance industry, a business which it says itself is “rapidly becoming a conduit for alternative reinsurance capital.”

At the moment the arrangement with Nephila positions the ILS manager with access to the returns of catastrophe exposed insurance business through the largest fronting provider in the business, while State National benefits from working with the largest ILS capital provider helping to grow its footprint.

That’s certain to result in increased interest in the fronting business model in years to come.

Also read:

Nephila taps catastrophe risk returns in deal with State National Companies.

Reinsurance capital, ILS & Nephila Capital help State National grow.

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