Nephila Capital, the world’s largest manager of catastrophe and weather insurance or reinsurance linked assets, is working with its MGA, Velocity Risk Underwriters LLC, to effect a third takeout of insurance policies from Florida’s Citizens Property Insurance Corporation in November.
The latest takeout approvals were announced this week by the Florida Office of Insurance Regulation, with Velocity Risk Underwriters set to administer a third Florida takeout, undertaken by State National Companies insurer subsidiary National Specialty Insurance Company.
The first takeout of Florida Citizens policies that Nephila Capital provided reinsurance risk capital for happened in late February 2016, through National Specialty which participated in a takeout of Florida wind-only policies, administered by Nephila’s Velocity Risk Underwriters.
The February takeout saw the State National owned insurer National Specialty enter into a fully collateralised quota share reinsurance agreement with Nephila’s Ananke Re reinsurer for up to 100% of the risks involved.
A second takeout was approved by the Florida Officer of Insurance Regulation in late March, allowing National Specialty to takeout up to 19,535 personal residential policies from Citizens Coastal Account. Again these are wind only policies and the takeout is being effected through and administered by Velocity Risk Underwriters.
Now a third has been approved by the regulator, for up to 8,421 wind-only insurance policies from the Citizens coastal account, to be taken out as of the 22nd November 2016.
Interestingly, the latest round of takeouts, which involves a number of insurers, is largely focused on coastal account policies, which is the more catastrophe exposed and those that Citizens had been using its Everglades catastrophe bonds to cover. As that coastal account shrinks, Citizens need for reinsurance and cat bonds may shrink with it.
Again, it’s assumed that Nephila Capital’s fund and collateralised reinsurance capacity will ultimately back the risk included in the takeout, while its MGA will administer the policies.
The policies are therefore being backed by capital markets risk capital in an efficient manner, which we’d assume helps Nephila to extract more premium value from the takeout reinsurance.
By leveraging a fronting-style insurer and its own MGA to effect the takeout, Nephila can reduce the frictional costs of acquiring a new pool of Florida wind risk, ultimately enabling its capital to get closer to the source of risk and avoiding the typical reinsurance market cycle and also saving on intermediary costs.
These takeouts, working with Nephila Capital, are also an efficient way for State National to increase the volume of policies that pass through its insurance organisation, while immediately reinsuring the bulk of the risk with Nephila as the transaction is effected.
Takeout transactions such as these are an example of ILS capacity and the capital markets shortening the risk-to-capital value chain, acquiring sources of property catastrophe risk through more direct routes and outside of the typical reinsurance renewal cycle.