State National Companies has reported growing fee income from its program business fronting relationship with ILS and catastrophe risk investment manager Nephila Capital. State National earned $3.2m from the relationship in Q2 of 2015.
That’s up from the $1.9m that State National reported in the first-quarter, as the Nephila program continues to ramp up. The $3.2m consists of $2.5m of capacity fees and $0.7m of premium related fees.
State National expects to benefit from the growth of alternative reinsurance capital and the increasing interest shown by insurance-linked securities (ILS) managers and institutional investor to get their capital closer to the underwritten insurance risk.
State National provides program services and fronting facilities for providers of insurance, reinsurance, ILS and institutional capital, who want to leverage its reach to access the returns of insurance underwriting business.
The firm has been working with Nephila Capital since the second half of 2014, helping the ILS manager to deploy risk capital through it’s admitted carriers, which have ‘A’ ratings across 50 U.S. states.
State National benefits from earning ceding fees, for providing risk capital providers with more direct access to primary insurance business, numbers which are growing at the firm as the Nephila program reaches greater scale.
For Nephila Capital, the world’s largest insurance linked securities and catastrophe risk investment manager with approximately $9.5 billion under management, the arrangement with State National allows it to access property insurance business using rated paper, with Nephila’s third-party sourced capital providing the reinsurance to back the risks underwritten.
The exclusive arrangement between the two parties allows Nephila to work with State National’s program services unit on property insurance risks in catastrophe zones, during 2015 and 2016. Nephila benefits from the rating and the 50 state license which gives it access to deploy risk capital into business it could not reach directly.
State National expects the ongoing inflows of alternative capital into re/insurance will benefit it, with more capital providers looking to use its program service and fronting facilities in order to get closer access to insurance risks.
The firm says that it sees “increasing velocity in our pipeline” for program services business, with the increased role of alternative capital one of the drivers. State National expects to generate ceding fees from program service provision in the range of $55m to $60m in 2015. The Nephila program alone is expected to generate from $10m to $13m in fees, with $5.2m generated in the first-half ($1.4m of premium fees and $3.8m of capacity fees).
The Nephila program is continuing to scale and State National explained that the ILS manager is currently investing in infrastructure to support this area of its strategy. The targeted premium volume to be written through the program for 2015 has been reduced to $150m, down from $200m, to give the program time to scale.
The minimum fee guarantees mean that State National and Nephila can build the program steadily, ensuring that the infrastructure is in place to deal with claims payments and managing the risks. Nephila benefits significantly from its exclusivity with State National that runs to the end of 2016.
State National is clearly aware that the innovative arrangement with Nephila Capital is driving further change in the ILS and reinsurance market, as more players seek to emulate this approach, either by launching service providers or seeking other ways to cut the levels of intermediation between the insured risk and the capital provider.
State National says that the Nephila program signified; “A transformative industry event providing institutional risk investors direct access to primary insurance risk.”
Arrangements, such as the one with Nephila, could bring significant new revenue to State National. The firm could enter into similar arrangements on other classes of risk, perhaps specialty, energy, or other risks that ILS and alternative capital providers would appreciate closer access to.
The firm clearly sees program services as a key piece of its strategy, explaining; “In Program Services, increased capital in the property and casualty insurance market, including the increased role of alternative capital, and the growth of offshore markets should drive demand for our services, as many of these firms do not have direct access to the primary insurance market.”