Nephila’s Syndicate 2357 lifts capacity target for 2020 to $554m

Nephila Capital, the largest insurance and reinsurance linked investment manager in the market, has again slightly lifted its stamp capacity target for the coming year to $554 million for 2020 for its syndicate at Lloyd’s.

In 2019, Nephila’s syndicate suffered a loss of of almost $84.4 million, which was around 50% better than the 2018 loss of $155.2 million.

But in the last year the financial impact of catastrophes and severe weather seems to have been unevenly felt, with the ILS fund managers MGA sourced insurance business written at Lloyd’s falling to a loss, but its reinsurance business profiting.

It’s important to note that Nephila Capital’s use of its syndicate at Lloyd’s is particularly sophisticated and syndicate 2357 plays an important role in how the ILS manager cedes risk between its operations around the world. So sometimes results aren’t as clear-cut as they may seem at first glance.

But it is clear that the primary catastrophe exposed property business Nephila writes at Lloyd’s and that is sourced through its managing general agency Velocity, was the major source of the loss experienced for 2019.

The MGA insurance business written at Nephila Syndicate 2357 experienced a $104.7 million loss for the year, while the reinsurance business written at the syndicate delivered a $13.8 million profit.

That was on the back of some $474 million in gross premiums written in 2019, almost $159 million of which was primary insurance and $315 million reinsurance.

The segment performance was a turnaround from the prior year, when reinsurance lines suffered the most from global weather and catastrophe events for Nephila’s syndicate.

For 2020, Nephila Capital is targeting an increased stamp capacity of $554 million, up from the $516.4 million of capacity approved for 2019.

The steady growth of the Nephila syndicate at Lloyd’s helps the ILS fund manager to leverage the Lloyd’s infrastructure and capital efficiencies within its broader business model and unlike many syndicates the manager largely sources its own business for the syndicate and does not seem to operate at Lloyd’s for access to underwriting business, rather for the recognised benefits to its overall model and business structure.

As a result, it is always unclear how the syndicate really benefits Nephila, as the manager utilises it to generate greater efficiencies across its business to the benefit of its investors and funds. Which also makes the reported performance figures less clear-cut than for most other syndicates in the Lloyd’s market.

Highlighting this, Nephila Capital’s reinsurer Demeter Re provides syndicate 2357 with collateralised reinsurance, with the two entering into a $74.1 million quota share arrangement in 2019.

That ensures some of the risk premium of the underwriting business from the syndicate, which often flows in from other underwriting vehicles, flows back to Bermuda based Demeter Re as well. It’s likely that enhances the capital efficiencies of the model for Nephila, as too does the funding of funds at Lloyd’s by its Poseidon Re vehicle as well as by the relevant corporate member.

Syndicate 2357 at Lloyd’s is an increasingly useful complement to Nephila’s overall business structure, providing access to risk, capital efficiency and a complementary underwriting vehicle for the firm, as well as an important piece of its global risk management architecture.

Finally, the syndicate is set to collect a further $41.7 million from its corporate member for a deficit on the 2017 year of account.

While this is partly due to the loss creep that occurred on that underwriting year, it is again important not to read too much from this as the way this syndicate is operated is unlike most others and this is most likely just a case of Nephila accounting for losses yet to be paid.