Fresh from an AM Best upgrade to A-, Knight Insurance Company is addressing a pipeline of program opportunities as it looks to diversify into areas such as property using a data-centric differentiated fronting model with a higher retention rate than many others in the space, according to president Amit Shah.

Amit Shah – Knight Insurance group

Amid the surge of entrants into the fronting space over the last few years, Knight has operated somewhat under the radar, despite having a larger capital base than most of its peers at around $830mn and being part of the Hankey Group of companies, which has combined assets totalling $19.5bn.

This April, AM Best upgraded the financial strength ratings of the parent and its carrier subsidiaries to A- as it pointed to “operating and process enhancements” by management over the past five years that have steadily improved operating performance while reducing adverse reserve development.

Leveraging the Hankey Group’s Nowcom technology company, Knight has also strengthened the monitoring and control of its MGA partners and third-party adjusters in claims settling, as well as tightened its underwriting guidelines.

And earlier this year it addressed the prior-year problem with the execution of a loss portfolio transfer (LPT) for around 30 run-off programs and an adverse development cover (ADC) to protect against further deterioration.

Last year underwriting results included $70mn of unfavourable development – even as Knight generated record net income of $163.3mn and ended the year with policyholders’ surplus at an all-time high.

Knight Insurance Group factfile

Transitioning portfolio

In an interview with Program Manager, Shah said that with the key AM Best rating restored to A-, Knight is now in a position to shift existing MGA programs that had previously been fronted by third parties back to its own paper.

It is also addressing a strong pipeline of new opportunities as it looks to diversify beyond its core commercial auto and general liability-focused portfolio into other lines, most notably property.

“We’re getting a lot of unsolicited submissions in from a lot of brokers. We’ve been busy moving existing programs to our paper first, but we did a couple of deals in the last month that are newer, and that’s on our paper.

“But our pipeline is filled up right now and our team is reviewing submissions and going through the due diligence process. We’re open for new business and we’re seeing that as our name has gotten out there, everybody has been looking at us now with the capital base we have,” Shah commented.

Last year gross written premium (GWP) was just under $700mn and Knight is on course to write about $800mn on an annualised basis this year – although the reported numbers will be lower, skewed by one-time adjustments for the LPT and ADC transactions.

The insurer has around 34 live programs with unaffiliated MGAs in its portfolio and a further 14 products written with affiliates, including sister company Westlake Financial Services.

Although Shah wouldn’t confirm specific MGA partners, a recent report from rating agency Kroll revealed that last year Knight’s biggest relationship by far was with Venture Underwriters, part of Allstar, itself part of CRC’s Constellation Affiliated Partners, which accounted for $111mn of GWP.

Knight Group – Top 10 programs

Other significant programs included Tradesman, Transportation Specialty Underwriters, QuadScore and Brazos Trucking, as well as insurtech Cover Whale, said Kroll, which also recently affirmed the carrier.

Knight’s portfolio spans a range of business lines including commercial auto liability, construction general liability, credit products, guaranteed asset protection and product liability.

In its report, Kroll noted the reliance on fronting arrangements to write those programs, with almost 70 percent of GWP written through State National, Clear Blue, Trisura Specialty and Accredited – services for which Knight would have typically paid a 5 percent fronting fee.

Although not all programs will transition now that the insurer has its own A- rating back, a significant amount will, including those where Knight wrote on a 100 percent net basis and only used fronting carriers for the rated paper.

“That process is already in place, so the fronting income will show up on our side now, and then we’ll pick up some collateral that should start getting released on those arrangements too. That’s our low-hanging fruit,” Shah explained.

Where Knight quota shares with other carriers on a reinsurance basis behind other fronts it will seek to increase their return on equity in light of the rating upgrade.

More skin in the game

Shah believes that with its A- rating restored, Knight is at an advantage to some of the recently arrived fronting carriers because of its balance sheet scale and its appetite to retain more risk. Historically Knight has retained almost 100 percent net.

Going forward, the carrier will typically look to retain at the group level 30-40 percent of the risk on programs it fronts on its paper, then cede the balance to reinsurers.

That is in contrast to most of the hybrid fronts, which typically will not retain more than 10-20 percent of the risk at a maximum, and in practical terms will look to retain less than 10 percent.

“That makes us a little different than all the other fronting carriers out there. We’re seeing more and more reinsurers that are coming out and asking fronts to take a significant position before they come in,” he commented.

Knight has a Cayman-based vehicle that can provide “rent-a-captive” services to MGA partners, allowing them to retain risk and further align with their fronting partner and panel of reinsurers.

The insurer is also debt free and is also not leveraged on the underwriting side with a net written premium to surplus ratio of under 0.74:1, giving it potential headroom for growth.

Property appetite

One growth opportunity being eyed by Knight is in property, as it looks to diversify its casualty-focused portfolio of programs.

“Given where the property market is and how tight capacity is, it might be the right time to get into that. So we’re looking to diversify a little bit and getting into the property market where it makes sense and where the rates are high,” said Shah.

He said the carrier has been working with reinsurers including Swiss Re to better understand property exposures and ensure it has the right data and modelling processes.

“We’re not going to come with a lot of capacity, we’ll start slow and see how things go,” said the executive.