Nephila Syndicate 2357 profit rises 65% to $312m on 25.5% CR

Syndicate 2357 at Lloyd’s, which is the flagship syndicate operated by Nephila Capital, a leading dedicated investment manager in the insurance-linked securities (ILS), weather and catastrophe reinsurance space, has reported a 65% increase in profits for 2023, as its combined ratio came in at a very low 25.5% for the year.

It’s a significant improvement over what was already a strong result from Syndicate 2357 in 2022, when it reported a combined ratio of just 57.5% and a profit of $189.1 million for the year.

Nephila Capital utilises Syndicate 2357 as a core component of its reinsurance market and investing infrastructure.

The syndicate helps Nephila to flow insurance and reinsurance premiums around the world in a more efficient manner, while also benefiting from Lloyd’s licensing and central fund as well as access to business in that marketplace.

Syndicate 2357 has always shown Nephila Capital’s desire to make best use of available regulated platforms to heighten the efficiency of reinsurance capital for its investors, so the syndicate plays an important role in how the ILS manager cedes risk between its underwriting structures and operations around the world.

In calendar year 2023, the Nephila Capital Syndicate 2357 underwrote fewer premiums at $432.9 million, down from $583.5 million a year earlier.

Partly, this will be a reflection of reduced assets under management at Nephila, but it also reflects the fact Nephila Capital increasingly utilises parent Markel’s insurance market infrastructure to source and manage the flow of premiums to its funds these days.

Reinsurance premiums written by Syndicate 2357 were up slightly at just under $300 million, but MGA insurance premiums are where the decline was seen, as they fell from $287 million in 2022 to $135 million in 2023, again reflective of Nephila’s use of Markel’s program fronting and insurance infrastructure, we suspect.

In 2023, Nephila’s syndicate 2357 saw the benefit of more reinsurance exposure and the higher attachments those contracts are now at in the market, as its loss ratio was just 10.6% for the year, down significantly from 2022’s 45%.

That was the real driver of the reduction in combined ratio from 2022’s 57.5% to 2023’s 25.5% (which appears, at this stage, to be a market-beating low CR to us), which helped in driving the $311.6 million in profit even with the lower volume of premiums written by the syndicate strategy.

So, that was an extremely profitable year for Nephila’s flagship syndicate at Lloyd’s, underscoring the value of the strategy for the ILS manager and its investor base, which will have benefitted greatly from the profit generated.

Nephila has once again lowered its stamp capacity target for the syndicate for 2024, to $449.6 million, which is lower than the target for $516 million it had targeted for 2023.

When we reported on syndicate 2357 last year, we noted that the return on capacity forecasts for prior underwriting years were looking particularly impressive.

A year ago, when we reported on Nephila’s 2357, the return on stamp capacity for the still-open 2021 year of account was reported at 27%. Now, with it closed, that underwriting year’s return on capacity is reported to be 32.1%.

The still open 2022 year of account is currently reported to have a return on stamp capacity of 38%, so more impressive as we suggested due to it having a lower combined ratio than 2021.

All of which suggests, that when the return on stamp capacity figures for the 2023 underwriting year are released, they are likely to be even higher.

The return on capacity metrics indicate very strong returns on invested capital flowing back to Nephila ILS strategies from the syndicate.

Also notable with Syndicate 2357 and its results, is the fact the syndicate repaid a $50 million loan to Nephila Syndicate Management that had been in-force at the end of 2022 and the managing agent charged slightly less fees for services to the syndicate in 2023, at $6.5 million, down from $7.5 million.

In addition, the way reinsurance supports the Nephila syndicate and flows risk premium back to reinsurance vehicles in Bermuda changed slightly, with Syndicate 2357 purchasing collateralised quota share reinsurance costing $96.2 million from Demeter Re for its reinsurance business in 2023, up from $55.6 million in 2022.

At the same time, the Syndicate 2357 excess of loss reinsurance with Poseidon Re was commuted in 2023 and not renewed, having spent $5.3 million on XoL reinsurance a year earlier.

So, the strategy has adjusted slightly, with quota share reinsurance now taking the lead in protecting the syndicates book and flowing a share in risk premium back to Nephila Capital’s Bermuda operation vehicles.