ILS, catastrophe and weather risk-linked investment fund manager Nephila Capital is set to participate in another takeout of insurance policies from Florida’s Citizens Property Insurance Corporation, alongside its MGA, Velocity Risk Underwriters LLC.
The December takeout from Florida Citizens will be the fourth that the world’s largest manager of catastrophe and weather insurance or reinsurance linked assets, Nephila, has participated in.
This latest round of takeouts was approved and announced recently by the Florida Office of Insurance Regulation, and will see Velocity Risk Underwriters administering its fourth Florida takeout, with the help of State National Companies insurer subsidiary National Specialty Insurance Company, which acts as a fronting company for these deals.
Nephila Capital first provided reinsurance risk capital to back a takeout via its MGA Velocity in late February 2016, with National Specialty assuming up to 17,534 wind-only policies from Citizens coastal account, which were then 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 reinsurance company for up to 100% of the risks involved.
A second takeout was then approved in late March, allowing National Specialty to takeout up to 19,535 wind only residential policies from Citizens coastal account. Again the takeout was effected through and administered by Velocity Risk Underwriters.
A third takeout was approved by the regulator at the end of August, for up to 8,421 wind-only insurance policies from the Citizens coastal account, to be taken out as of the 22nd November 2016. This takeout is still pending being actioned.
The fourth takeout was approved just at the end of September and again these are Citizens coastal account wind only policies, but just 2,217 are to be taken out by National Specialty and administered by Velocity Risk Underwriters in this case. The date for this takeout to be actioned is the 20th December 2016.
So in total Velocity could be administering over 47,700 ex-Citizens wind only coastal account policies by the end of 2016, with the risk capital underpinning and reinsuring these transactions provided from Nephila Capital’s investment funds. It’s assumed that Nephila Capital’s fund and collateralised reinsurance capacity will ultimately back the risk included in the takeout, while its MGA Velocity will administer the policies.
Because of the way Nephila Capital approaches its sourcing of risk via primary markets the underlying policies end up 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 and ultimately can pass on cost benefits to consumers as well.
Through the use of a fronting-style insurer and its own MGA, Nephila can reduce the frictional costs of acquiring a new pool of Florida wind risk bringing its capital closer to the source of risk.
State National also benefits, we’d imagine by increasing the volume of policies that pass through its insurance organisation, while immediately reinsuring the bulk of the risk with Nephila at the time the takeout is effected.
These takeouts are a great example of ILS capacity and the capital markets finding a way to shorten the risk-to-capital value chain, acquiring property catastrophe risk through a more direct routes and outside of the typical reinsurance renewal cycle.