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Any fronting sector dislocation can benefit State National: Markel execs


Senior Markel executives have said that any dislocation seen in the program fronting space of the insurance market should benefit the State National business, which appears a possible reference to challenges affecting the sector after the alleged collateral fraud affecting Vesttoo facilitated reinsurance deals.

state-national-logoJeremy Noble, President of Insurance at Markel, was discussing the group’s program services and fronting operations, highlighting growth and also saying the company is well-positioned to take advantage of any fronting sector challenges that emerge.

“Total premium production within our programme services and other fronting operations totalled $1.5 billion this year, versus $1.4 billion a year ago,” Noble said during Markel’s second-quarter 2023 earnings call.

“This 5% increase in operating revenues for the first six months of the year, was due to expansion of existing programmes and the addition of new programmes,” he added.

Highlighting that, “Our State National team continues to perform extremely well and we are pleased with the business development pipeline we see.”

He then went on to reference specific challenges the fronting sector could face, which is seemingly a direct acknowledgement that there are some issues due to the alleged collateral letter of credit fraud affecting reinsurance provided via insurtech Vesttoo.

“Any dislocation in the fronting space should see State National benefit,” Noble said, “thanks to its strong and reputable history and leading market position.”

As we reported recently, the fronting for managing general agent (MGA) space has experienced strong growth, with a number of hybrid fronting companies emerging over the last few years.

Some of these companies are now managing the fallout of being exposed to reinsurance provided via Vesttoo-linked arrangements, which has driven challenges in the fronting sector as players scramble to identify exposure to the alleged fraudulent LOCs and try to arrange replacement collateral and reinsurance, where necessary.

As a result, Conning said this could affect MGA growth while any shake-out continues.

All of which is clearly an opportunity for established fronting players that are not exposed, or for who it is very minimal and we’ve already had Palomar saying it sees a possible opportunity for its fronting business emerging due to the Vesttoo linked issues.

How dislocated the fronting sector becomes remains to be seen, but there is already some signs of a flight to quality in the wake of the LOC collateral issues, sources tell us, as you might expect.

With AM Best reviewing fronting collateral as a result of the issues being experienced, the pressure on some fronts is likely to rise and if nothing else, the work to replace collateral and work through the related issues is going to slow some growth velocity for them.

Noble’s comments seem a direct reference to the Vesttoo collateral issues, but it remains too early to know if a flight to quality could become more meaningful in fronting, or whether existing players will be able to adequately deal with any collateral issues they face quickly enough to retain business and continue on their growth paths.

Noble concluded, “Within our State National business, you know, we’re really pleased with where we stand there. We are expanding a few very strategic relationships. We’ve actually probably done a little bit better in retention of some of the programmes than we would have anticipated. We’ve onboarded a number of new programmes and equally I think the pipeline at State National looks very good.”

As a reminder, State National fronts a significant amount of business for capacity provided by Markel’s insurance-linked securities fund management unit Nephila Capital.

Fronting for collateralized sources of reinsurance capacity that are backed by cash in trust and treasuries, as is the way in ILS markets, may become far more popular with those looking for program capacity now.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.

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