Fronting start-up Southlake Specialty targets diversified portfolio

E&S fronting carrier start-up Southlake Specialty and its admitted subsidiary Westlake Specialty will look to grow a book of business outside the commercial auto focus of affiliate NTA Underwriters, LLC by targeting diversifying product lines with third-party MGAs, The Insurer can reveal.

Southlake Specialty – owned by NTA founder Yogesh Kumar Chhabra – and its subsidiary were earlier this month assigned a financial strength rating of A- (Excellent) and a long-term issuer credit rating of “a-” by AM Best ahead of starting underwriting this quarter.

The ratings agency said the ratings consider Southlake’s “excellent projected risk-adjusted capitalization and sound business strategy”, which capitalizes on its expertise in the commercial auto insurance market.

Southlake will provide fronting paper on an E&S basis, with Westlake adding admitted capacity when required for specific geographies and product lines. The start-up has a financial size category of VII, which applies to carriers with $50mn to $100mn of surplus.

Although business will be initially generated through the start-up’s affiliation with NTA, Southlake’s strategy includes plans to expand its relationships with unaffiliated MGAs.

“Southlake’s senior management team has extensive experience and a solid track record in the commercial auto marketplace. AM Best believes this experience, as well as management’s relationships with distribution sources, will be key to Southlake quickly gaining traction in its targeted market,” said the agency.

Fronting relationships

In an interview with this publication, NTA and Southlake president and CEO Chhabra said that one motivation to launch Southlake was to provide existing capacity to the trucking and commercial auto specialist MGA, which also has an established relationship with State National and Clear Blue, supported by a panel of reinsurers.

“The NTA program is large and we wanted to have it on more than just one carrier’s paper. We are paying a lot of front fees so we wanted to capture some of that ourselves,” he explained.

But he added that the start-up was not established purely as a vehicle for NTA, but also to capitalize on a “great opportunity” to operate as a fronting carrier in the open marketplace.

“We will start the company with our existing affiliated MGA relationship, but are open to doing business with unaffiliated MGA and wholesale partners. We are open to program business as well as pure fronting.

“Our goal is to diversify into different product lines as well. We have licensed the company very broadly and are looking at opportunities in commercial auto and trucking outside of NTA, and in business lines outside of commercial auto and trucking,” he said.

NTA is understood to currently write annual premiums over $400mn across all lines.

Also speaking to The Insurer, NTA’s CUO Ken Sharp said the new carriers would consider 100 percent fronting opportunities as well as taking a share as a participatory front.

He added that Southlake will look to access business through reinsurance brokers but also via existing contacts with other MGAs.

Independently operated

Despite the affiliate relationship between NTA and the new fronting platform, Chhabra said the insurance carriers will operate “totally independently” from the MGAs.

“There will be no relationship other than common ownership and our carriers will work with our own MGAs just as they would with outside unaffiliated MGAs. And NTA will continue to have its relationships with existing partners.

“We do not plan to stop doing business with existing partners and moving all of that business to our own paper,” he stated.

The executive said there will be “clear separation” and that will be evident in the management structure at the carrier platform that is yet to be announced.

The Insurer comment

The rationale for launching Southlake appears to be twofold. NTA is a large MGA – thought to be one of the largest in its space and among the most significant reinsurance programs in the market for trucking and commercial auto.

In a cyclical marketplace, access to additional paper – especially that with an affiliate – provides certainty for an MGA and also fuel for growth when opportunities present themselves in a hardening environment, as they have recently in commercial auto.

Multiple avenues to the reinsurance market allow an MGA to broaden its access to capacity and diversify any counterparty concentrations.

But with high demand for fronting capacity elsewhere the launch of the carriers also provides the opportunity to generate a new stream of fee income from unaffiliated MGAs in a broad range of business lines.

The cornerstone relationship with NTA will allow Southlake to gain traction quickly with a readymade premium base, which should give it greater flexibility to find better opportunities in the marketplace to build its portfolio, without the need to scramble to put business on its books.