Nephila almost doubles Syndicate 2357 capacity to $283.2m

Nephila Capital, the largest manager of catastrophe and weather insurance or reinsurance linked assets, has added a significant amount of capacity to its Syndicate 2357 vehicle at Lloyd’s of London, while the business mix written by the syndicate has changed as it supports the ILS manager’s growing U.S. MGA activities.

For 2016 the Syndicate 2357 stamp capacity had been put at $178.9 million in the prior year’s accounts, although is put at $160.9 million in the latest report.

For the 2017 underwriting year at Lloyd’s Nephila syndicate 2357 will have a considerably larger stamp capacity, almost doubling it to $283.2 million.

The business plan has shifted a little as well, as the syndicate now works closely with Nephila’s managing general agent operations in the United States, so supporting property insurance that is written through arrangements with State National and via the ILS manager’s own Velocity Risk Underwriters LLC MGA.

As we wrote recently, Nephila Capital has started to use the Lloyd’s syndicate platform for its reinsurance of program business, benefiting from the market’s rating, leverage and reducing the need to collateralise this business directly.

This has shifted the business mix at the Lloyd’s syndicate and had an impact on the syndicate’s reported profitability for 2016, as the role it plays in Nephila’s ILS platform shifted slightly in 2016.

For the full-year 2016 the reported profit of Nephila Capita’s syndicate 2357 is $15 million, down slightly from $16.7 million in 2015. That’s despite gross premiums written of $175 million, more than double 2015’s $73 million, but explained by a combined ratio of 80%, compared to 2015’s 45%.

Explaining this is the addition of the MGA insurance business from the U.S., which naturally has a much higher combined ratio that the reinsurance business the syndicate also underwrites.

In 2016 syndicate 2357 saw $107.7 million of gross premiums from this business, compared to $52.8 million of property catastrophe reinsurance, $4.4 million of index trigger reinsurance and $10.3 million of weather risk business.

Due to the way the syndicate is now used the profitability profile has changed dramatically, but it’s likely the benefits of utilising the Lloyd’s platform for the MGA business far outweigh any reduction in profits seen in its reports, as it will add efficiency to that pipeline of risk into the Nephila ILS fund’s.

It’s clear from the accounts that the MGA business has a much higher loss ratio, with cumulative gross claims incurred in 2016 of almost $50 million which are mostly from the MGA insurance business, but its hard to see the full impacts of the reinsurance that happens within Nephila’s overall structure to enable the risk to be channeled back to its ILS funds and investors.

Of course it’s also not possible to look through to the true profitability of the MGA business, as it is not originated in the syndicate itself. The syndicate reports show the MGA insurance segment underwriting result as unprofitable for 2016 before investments, but without being able to see how profits are earned prior to that business even entering the Lloyd’s domain it’s impossible to say how profitable or otherwise it really is.

To give you an idea of how complicated the structure of this can be, Nephila’s syndicate 2357 inherited $23.7 million or risk from its Ananke Re reinsurance vehicle at 1st Janurary 2016, taking on $23.7 million of in-force insurance business. Ananke Re had previously been reinsuring the State National program.

On the other side, syndicate 2357 enters into a quota share reinsurance arrangement costing $20m with Nephila’s Poseidon Re vehicle for the catastrophe coverage it needs, as well a quota share costing $6.78m with Nephila’s other reinsurer Demeter Re to cover the weather business underwritten.

As well as the quota shares, syndicate 2357 buys collateralised index reinsurance from Poseidon Re to cover the MGA insurance business as well, at a cost of $14.26m.

So with risk flowing into and out of the syndicate via differing means, the impact of the MGA business and its higher combined ratio is possible to view on the syndicates reported accounts, but the true impact and benefit to Nephila’s broader business, its ILS funds and investors is harder to assess.

As this MGA business grows it is to be expected that the syndicate 2357 stamp capacity will grow in-line with it and of 2017’s forecast capacity of $283.2 million it is likely that Nephila’s MGA business will make up a significant proportion of that.

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