Nephila’s Lloyd’s syndicate picks up State National program risks

Nephila Capital’s syndicate 2357 at Lloyd’s of London began to pick up risks through the State National program business arrangement in 2016, as the largest manager of reinsurance linked assets switched away from one of its collateralised vehicles as the program grew.

Before 2016, the world’s largest insurance-linked securities (ILS) fund manager, Nephila Capital, had used its Ananke Re reinsurance vehicle to reinsure risks coming out of its program business arrangement with specialist primary fronting and program services insurer State National Companies.

In 2016 however, it looks like Nephila Capital opted to route at least some of this business via its Lloyd’s of London syndicate, which will have offered some benefits due to the rating it shares from the Lloyd’s market, as well as the leverage and reduced need to collateralise the business directly.

It’s clear that in 2016 the program services division at State National grew significantly and that a large proportion of the growth is down to the Nephila program relationship, which has proven to be a successful way for the ILS manager to access risk from further up the value-chain, while State National benefits from ceding and servicing fees it earns for its fronting and management.

In 2016 State National reports that program services business brought in around $1.3 billion of gross underwriting premiums, up from almost $1.12 billion in the prior year. Significant premium gross was seen in California, Texas, Florida, and New York during the year.

Of course almost all of this risk is ceded out immediately to the reinsurance and risk capital providers for whom State National fronts and underwrites business, largely through quota share arrangements.

The increase in program services premiums written and ceded out to capacity providers, including Nephila, provided State National with $73.3 million of ceding fees in 2016, up 8% from the $68 million earned the year before.

This continued growth has been largely attributed to the scaling up of the Nephila Capital program, as the ILS manager gradually ramps up its activities that bring it risk more directly and outside of the reinsurance renewal cycle.

Interestingly and perhaps helping to reflect the growth of the Nephila Capital program, the ILS manager has utilised its Lloyd’s syndicate 2357 as the reinsurer for its program business ceded from State National through 2016.

In 2015 Nephila’s Bermuda domiciled reinsurer Ananke Re took this role, and at the end of that year State National listed Ananke Re with a gross reinsurance recoverable of $51.36 million for it (which we believe to be the unearned premium from the program business), while it held almost $620 million in order to collateralise the reinsurance agreement.

At the end of 2016 Ananke Re is no longer part of the top 10 sources of reinsurance recoverable for State National, but right up there instead is Lloyd’s Syndicate 2357, with a reinsurance recoverable of almost $111.7 million (again representing the unearned program business premiums).

That suggests the size of the program premiums that flowed through the Nephila has doubled in just one year, very impressive growth for the ILS manager.

At the same time, switching to the use of Syndicate 2357 provides a way for Nephila to post less cash collateral for the premiums generated by the program, while also benefiting from being a rated entity through Lloyd’s and an element of leverage through the Lloyd’s structure.

By routing the State National program business premiums through its Lloyd’s entity Nephila Capital will be adding extra efficiency to its capacity, which essentially allows its capital to go further than before. Ultimately this is good for both parties, State National earns additional fees as the program grows, and of course Nephila’s third-party investors benefit from the access to risk and greater margins earned.