Specialist fronting and program service insurer State National Companies has acquired the first of the shell insurance companies it said recently it would purchase to underwrite business exclusively for its program arrangement with ILS manager Nephila Capital.
State National’s most recent quarterly results revealed that the company would use “commercially reasonable efforts to acquire one admitted and one non-admitted property and casualty insurance shell company” which would then be put to work to underwrite business specifically for ILS and catastrophe risk investment manager Nephila.
The program arrangement between State National and Nephila Capital enables the ILS manager to bring its reinsurance risk capital closer to the risk, by directly backing insurance fronted through State National.
The acquisition of shell insurers for the Nephila program will provide the ILS manager with additional flexibility in deploying capacity, the ability for it to brand the insurance paper as its own and the opportunity to grow this aspect of the business, as it seeks to put third-party investor backed reinsurance capital directly behind property catastrophe insurance risks.
State National announced on Friday that a subsidiary, State National Insurance Company, Inc., has entered into an agreement to acquire a shell insurer named United National Specialty Insurance Company from Diamond State Insurance Company for $7.35 million, excluding the capital and surplus.
United National Specialty Insurance Company is an admitted shell insurance company with licenses in 49 of the U.S. states (all excluding Pennsylvania).
This is the first of the shell insurers to be purchased for the Nephila Capital program. State National executives discussed the development on the firms recent earnings call, saying that this would “further enhance” the relationship between the two firms.
David Hale, CFO and COO of State National, said that the acquisition of the shell insurers, beginning with this company, would for Nephila “solidify their infrastructure” as they increasingly provide risk capital to back primary property insurance business.
Following the acquisition, the shell insurers will have a three-year period of premium production as part of State National, after which Nephila will have an option to acquire the insurers themselves.
Hale explained that if Nephila exercise this option to buy the insurers “contractual minimum payments to State National will extend by an additional two years, to at least 2021.”
Hale continued; “The exercising of the option would be beneficial to Nephila, in part due to the ability to monetise their investment in catastrophe exposed property insurance.
“This is likewise beneficial to State National, in that our model would be validated as a proven conduit by which alternative capital can access the primary insurance market.”
If Nephila doesn’t exercise the option to buy the shell insurers from State National their capacity would continue to be used “for the ongoing growth and expansion of the Nephila relationship,” Hale explained.
Through the shell insurers Nephila Capital will be able to access the type of business they want to write, using dedicated insurance paper, backed up by their reinsurance risk capital.
State National CEO Terry Ledbetter said that this is a “transformative structure” in the re/insurance industry, giving capital closer and more direct access to risk.
State National also explained a little more detail behind the reinsurance arrangement that was revealed in the carriers recent quarterly filing, which we discussed last week here.
It relates to an agreement entered into and effective from January 1st 2016 under which State National will, at Nephila’s request, transfer some of the risk that would otherwise be reinsured by Nephila to other excess reinsurers.
According to State National this is due to a change in the structure of the arrangement, which in the past saw the risk reinsured through Nephila’s Ananke Re vehicle, but will in future see the Lloyd’s of London syndicate 2357 acting as a counterparty instead.
So instead of collateral in trust from Ananke, State National will receive access to the Lloyd’s syndicate trusts instead, the executives explained, and as business is ceded through to the Nephila syndicate some other reinsurers will also take some of the risk through the new excess reinsurance arrangements.
The switch to using the Lloyd’s syndicate will likely add extra efficiency to the arrangement for Nephila, perhaps allowing the firm to take advantage of the Lloyd’s central fund as an added strength, as it channels the risk back to its investment funds.
It’s clear that the fronting arrangement between State National and Nephila Capital is destined to grow in importance, as the pair put in place structures and mechanisms to make the transfer of insurance risk to capital as efficient as possible.
It’s fascinating to see Nephila Capital make use of its various structures and arrangements to secure more direct access to risk, bringing its reinsurance risk capital as close to the consumer as possible. In this way the efficiency of ILS capital can flow right through to the insurance product, benefiting consumers, and also helping Nephila to originate risk more directly and efficiently as well.
Subject to regulatory approvals and closing conditions, State National’s acquisition of the shell insurer for Nephila is expected to complete by the end of the third quarter of 2016.