Velocity Risk to acquire a Nephila program insurer from State National

Velocity Risk Underwriters, a catastrophe exposed property insurance specialist managing general agency (MGA) operation that was originally set up by ILS manager Nephila Capital is set to acquire one of the fronting carriers from State National that had previously been a source of paper for underwritten business that was channelled to Nephila’s funds.

Velocity Holdco, LLC is set to acquire Independent Specialty Insurance Company (ISIC) from its parent United Specialty Insurance Company (USIC), which is a fronting carrier of the State National Group, a division of Markel.

Velocity Holdco and USIC have entered into a stock purchase agreement under which the former will sell its 100% ownership stake in ISIC to Velocity.

USIC is set to take on all of the liabilities of ISIC when the acquisition completes, entering into a loss portfolio transfer reinsurance agreement, while State National will then guarantee USIC’s obligations.

It’s an interesting move, not least for the links to Nephila Capital.

Of course, Nephila was the owner of managing general agency (MGA) Velocity Risk Underwriters LLC until it sold the MGA to funds managed by Oaktree Capital Management, L.P. in a deal that completed in early 2022.

Previously, Independent Specialty Insurance Company (ISIC) was the main carrier for certain catastrophe exposed property insurance programs that Velocity wrote and Nephila Capital provided the reinsurance capital to back, with all the risk reinsured back to one of Nephila’s Lloyd’s syndicates.

In fact, it is possible that ISIC was one of the shell insurance companies specifically purchased by State National for program business work with Nephila, although we cannot be sure due to name changes of the entity that are hard to track.

While the ownership stake in Velocity was sold, allowing Nephila’s parent Markel to reaslise a significant chunk of value from its ILS platform, Nephila continues to be a capacity provider to Velocity as well, getting significant premiums from the MGA still.

Velocity Risk taking ownership of this fronting carrier gives the MGA its own excess and surplus lines paper and puts its risk to capital pipeline further under its own control, removing the need to utilise State National as a front for that type of business that ISIC writes.

It also means ISIC will be able to write business for multiple capacity sources, perhaps also continuing to channel risk to Nephila Capital at times as well.

Advanced MGA’s are moving in this direction, of owning insurance paper of their own to reduce the fees they need to pay out and streamline their own orignation pipelines, so being able to deliver increasing value to the capacity providers they work with.

As a result, the cost-of-capital can be further managed and even reduced, making capacity even more efficient and delivering the products more directly to end insured clients.

Rating agency AM Best did also note on the deal that ISIC could face a ratings downgrade after the acquisition by Velocity Holdco closes, as the fronting insurer will no longer be part of an intercompany pooling agreement with State National.

However, Velocity will have every chance to make arrangements to enhance the ISIC rating should it need to by funding the carrier, although a lower rating may also be ok for certain types of business.