The world’s largest insurance linked securities (ILS) investment manager Nephila Capital is investing $10m in a concurrent private placement with the initial public offering (IPO) of shares for Florida Citizens takeout insurer Heritage Insurance Holdings.
The holding company is the parent of recent first time catastrophe bond sponsor Heritage Property and Casualty Insurance Co., which recently secured $200m of capital markets backed reinsurance from its Citrus Re Ltd. (Series 2014-1) and Citrus Re Ltd. (Series 2014-2) catastrophe bond deals.
Nephila Capital, the largest investment manager in the ILS and reinsurance space, already has a relationship with Heritage, as a participant in its reinsurance program through Nephila’s collateralized reinsurance vehicle Poseidon Re Ltd. Now the ILS manager will deepen that relationship by participating in the firms IPO.
According to an SEC filing, Heritage is offering 6,000,000 shares of common stock in this IPO, with an expected price somewhere in the range of $14.00 to $16.00 per share. Nephila Capital is set to purchase $10m of Heritage stock through an affiliate vehicle, Ananke Re Ltd., concurrent with the IPO and at the same price as the closing up to a maximum of $16 per share.
Heritage is a high-growth insurer, which due to taking on Florida Citizens policies has built itself a profitable portfolio of Florida catastrophe risk very quickly. Participating in the IPO gives Nephila Capital a chance to profit from the investment return and benefit from further growth of Heritage as it likely expands, as most other Florida depop insurers have expressed a desire to.
However this investment has an added benefit for Nephila. As a result of participating in this IPO Nephila Capital will secure itself a right of first refusal to participate in Heritage’s future reinsurance programs up to 31st May 2019.
That right of first refusal alone could well be worth the $10m investment, given the increasingly competitive nature of the Florida property catastrophe reinsurance market. It makes a lot of sense to secure yourself a position in the renewal of a growing Florida-focused property insurer at this current time, a great example of an ILS manager originating its own risk in a slightly more unusual way.
We’ve said before that ILS managers are well-positioned to act as venture capital for small insurers or reinsurers, particularly if investments are treated in such a way that they can be capitalised efficiently. Here Nephila is not only providing capital support to an insurer that it already works with, it is also securing the rights to deepen its participation as a reinsurer over the next five years. A very smart use of capital.