The working relationship between specialist fronting and program services insurer State National Companies and the world’s largest ILS manager Nephila Capital continues to deepen, as the pair now have an alliance to acquire shell insurers to write business exclusively for Nephila.
Additionally, it is clear from the latest set of State National quarterly results that the Nephila Capital program, which sees the insurer help ILS and catastrophe risk investment manager Nephila place its reinsurance risk capital directly behind fronted insurance business, is gaining scale as State National purchased its first excess reinsurance policy to cover some of the risks generated under the program.
State National reported that total revenues from its program services arrangements reached $16.2 million, up $2.1 million or 14.9% from Q1 2015.
From the Nephila Capital program alone, State National reported $2.3m of ceding fees for the first-quarter, which is up from $1.9m in Q1 2015, reflecting the scaling up of the program and alliance between the two.
Revenue growth in program services was driven by increased ceding fees from both new and existing client programs, with the scaling of the Nephila program likely a significant contributor as State National helped bring reinsurance risk capital further up the value-chain.
Given the continued growth of State National’s program services activities, the growth of the Nephila Capital alliance which is scheduled to result in a minimum of $51.5 million ceding fees through 2019 for the insurer, and the fact it has announced an extension of its relationship with Meadowbrook, its targets have been amended upwards.
Chairman and CEO of State National Terry Ledbetter commented; “Based on this agreement with Meadowbrook, in addition to our view of current programs and pipeline opportunities, we are raising our 2016 Program Services ceding fee outlook range to $61 to $66 million from our prior range of $55 to $65 million.”
Evidence that the relationship and alliance between State National and Nephila Capital is deepening further is found in the insurers first-quarter report, where it reveals that the firm will use “commercially reasonable efforts to acquire one admitted and one non-admitted property and casualty insurance shell company” which will be put to work to underwrite business specifically for Nephila.
That would give Nephila Capital its own primary insurance pipeline, rather than sharing the underwriitng vehicle with other capacity providers. Nephila will also have a three-year option to purchase the shell insurance companies, starting three years after the shell companies first write premium.
If Nephila exercises this option, State National would receive contractual minimum payments for an additional two years. State National said that the process of acquiring the shell companies for Nephila will begin this year.
Shell insurers will give Nephila 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 its business, as it seeks to put risk capital directly behind property catastrophe insurance risks.
Also, State National reported that it saw a $7.4m increase in program services receivables from Nephila Capital. This is related 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’s reinsurance vehicle to other excess reinsurers.
This agreement is likely a way for Nephila to control its exposure to the primary risks it is assuming through the program business relationship with State National. It allows Nephila and State National to ensure that losses above certain excess points are ceded elsewhere, and also would enable the firms to control concentration risks as the program portfolios of risk scale up.
Where the agreement is used, State National will enter into agreements directly with excess reinsurers, and Nephila guarantees the obligation of those reinsurers and pays the premiums on State National’s behalf, on a quarterly basis in arrears.
State National said that it purchased one excess reinsurance policy under this new agreement during the first quarter of 2016, again a sign that the program is scaling as it felt the need to acquire coverage for a portion of the risk.
The growth of the program will ultimately benefit State National with increasing revenue from fees and Nephila Capital and its investors from the access to business, as well as the disintermediation of the typical syndicated reinsurance market process (which may save some costs as well).
Clearly Nephila Capital sees the program business, giving its reinsurance capital fronted access to primary sources of property and catastrophe risk, as key to its origination and acquisition strategies, with the plan to acquire shell reinsurers and the ceding of certain risks both signs of how the firm is managing the strategy and also controlling the level of exposure assumed.