State National Companies has extended and expanded its program business fronting partnership with ILS and catastrophe insurance and reinsurance risk investment manager Nephila Capital through 2019.
The relationship, which has been in place since 2014, sees Nephila Capital providing its third-party reinsurance capital to back catastrophe exposed property insurance programs underwritten by specialty property casualty insurer State National.
As the insurance-linked securities (ILS) and reinsurance investments market increasingly seeks to bring its efficient capital closer to the source of risk, breaking down the risk to capital value-chain, agreements such as this have helped Nephila source access to new risks working in partnerships with companies that have broad access to insurance programs.
The companies have updated their agreement, which State National say shows “Nephila’s long-term commitment to State National as its partner to access the primary market for U.S. catastrophe exposed property business.”
“In exchange for the continued exclusive right to produce such catastrophe exposed property insurance via State National, Nephila has agreed to pay State National contractual minimum ceding fees through 2019.”
“This is a transformative alliance in our industry. We are proud to extend our partnership with Nephila, and thereby further validate the pairing of a leading investment manager specializing in catastrophe insurance risk with our preeminent fronting services and access to the U.S. market. We are now both better positioned to benefit from the market trends that we believe will generate attractive growth for both Nephila and State National,” stated Terry Ledbetter, State National Chairman, President and Chief Executive Officer.
Agreed contractual minimums over the term of this agreement amount to $51.50 million of fees over the four-year term to end of 2019. The arrangement moves out some of the fees that would have been due in 2016 to 2017 and beyond, enabling the program to ramp up.
The fees are subject to State National’s maintaining its “A” A.M Best rating, but could be reduced if State National is unable to provide capacity in a single year or if something causes it to be constrained from writing premium.
Nephila may terminate the exclusivity, under certain circumstances, which could reduce the minimum fees to $32.5 million for 2016 through 2019. If the agreement was terminated, State National would then have the ability to write the catastrophe exposed property business for other capacity providers.
Frank Majors, Nephila Capital’s Managing Partner, commented; “Working with State National provides the conduit necessary for us to access the primary insurance market. We are pleased to have strengthened our partnership with State National through this new arrangement, which aligns with our business plan and provides enhanced opportunities to efficiently deliver insurance risk to our investors.”
Ledbetter stated in State National’s quarterly results that the agreement “demonstrates Nephila’s long-term commitment to access the primary market for U.S. catastrophe exposed property business. State National will benefit from the anticipated $51.5 million of contractual minimum fees over the extended term.”
In Q3 2015 State National reported that its Program Services segment saw revenues of $18.8 million, an up $6.7 million, or 54.1 percent, from the third quarter of 2014 as its work with partners like Nephila grows.
The Nephila Capital program added ceding fees of $4.6 million, made up of $3.8 million of capacity fees and $0.8 million of premium related fees.
The relationship works both ways, with Nephila Capital’s efficient risk capital able to augment the ability of State National to write more risk and take advantage of the increase in risk capital in insurance and reinsurance.
Meanwhile Nephila Capital benefits by getting closer to the ultimate source of risk, breaking down the value-chain and making its acquisition of catastrophe exposed property insurance risks more efficient.