Nephila Climate launches to expand ILS managers role in weather risks

by Artemis on January 30, 2018

Nephila Capital, the largest insurance and reinsurance-linked fund manager with approximately $11 billion of ILS assets under management, is expanding its role in weather, climate and environmental, social & governance risks with the launch of a dedicated unit, Nephila Climate.

Nephila Climate (NCx) will be dedicated to weather risk transfer and climate resilience products, areas Nephila Capital has been underwriting and accessing investments in for many years. But the launch of this dedicated unit formalises this and provides a platform for future growth.

Dr. Richard Oduntan, based in Bermuda and the head of Nephila’s weather risk investment team, has been named CEO of Nephila Climate.

“NCx stands at the intersection of two trends: steadily increasing interest in weather risk transfer alternatives from companies and intermediaries around the world, and the investment community’s collective push to develop products aligned with impact and sustainable investing goals,” commented Dr. Oduntan. “NCx will also satisfy a growing demand from investors for additional non-correlated returns.”

Nephila recognises that the impact to corporations from increasingly volatile weather is significant and often underprotected by traditional risk transfer, insurance and reinsurance products.

These weather impacts extend well beyond the energy sector to include retailers, airlines, food and agriculture, and outdoor entertainment. In fact most corporations have weather risks of some description, but many do not assess or value them, or understand how to protect themselves against these risks.

Barney Schauble, Chairman of Nephila Climate, commented, “We are proud to have been early believers in climate-driven investments, developing the initial market for weather risk transfer and creating an opportunity for investors in a way which makes for a more sustainable economy.”

Nephila has been involved for 17 years in exploring and investing in non-correlated risks in the weather space. The ILS manager has a dedicated weather risk fund, through which its investors access weather and climate related exposures through investments directly in insurance or reinsurance risks.

Nephila has been involved in many of the weather risk transfer markets landmark transactions, including the Kelvin Ltd. weather risk linked catastrophe bond issued in 1999 and launched its flagship weather investment fund in 2005.

Nephila has also served as the risk capacity provider and advisor to Weatherbill, which later became the Climate Corporation, and advised and supported the growth of REsurety, an independent risk transfer intermediary in the wind energy space.

This relationship with REsurety led to the creation of the Proxy Revenue Swap (PRS) product, that helps renewable energy developers (wind, solar and hydro) to secure long-term predictable revenues as an alternative to traditional Power Purchase Agreements (PPA) by transferring the weather volatility away from them.

Microsoft was one of the first to use a proxy revenue swap to stabilise its long-term energy costs in connection with a wind project, the 178-megawatt Bloom Wind project in Kansas.

The company says that the launch of Nephila Climate is the, “latest expansion of Nephila’s weather and climate-driven investing business in response to the growing demand from both hedgers and investors.”

Nephila Climate hopes to create relationships with external partners that seek to solve weather risk issues in climate-related investment initiatives.

The company will also work to develop weather-linked credit products, which could help financing projects for renewable energy and also help commercial and government entities better manage their climate resilience risks that are related to weather volatility and extreme weather across industries and sectors including logistics and transportation, construction, mining and minerals, food and agriculture, hospitality and retail.

For Nephila Capital and its investors a renewed and deepened focus on weather and climate related risks could bring significant new investment opportunities to the firm.

The size of the opportunity is significant, weather risks affect the majority of corporations in some way. Factset, reported that almost half of the companies in the S&P 500 cited weather as having a negative impact to their earnings in third quarter earnings calls in 2017.

This earnings volatility caused by weather can be hedged out, through the use of insurance and other risk transfer structures.

Nephila Capital is a specialist in this area, having years of experience in providing such solutions to clients. With the capacity provided by Nephila coming directly from institutional investors the efficiency of solutions that transfer weather risk away from corporates into the capital markets could be a significant boost for companies affected by weather volatility.

Speaking to Artemis recently, Nephila’s Oduntan and Schauble said that issues around climate and resilience are a big opportunity for the ILS business model.

The creation of Nephila Climate provides the structural platform for the company to renew its focus and double-down on the underwriting of weather risk solutions for clients, while originating new client opportunities through the new brand as well.

Schauble said that the company has been seeing increased demand for its weather risk solutions and as a result has been growing into that strategy, both in terms of the investor assets that support it and the risk it takes on.

Nephila has a team of ten weather risk specialists already and they will now sit within the new unit.

“Nephila Climate is being launched to think more deeply about these issues and to try to think more deeply about how weather risk can be integrated into capital solutions,” Schauble explained.

There is also an opportunity for Nephila to leverage its market-leading expertise in providing weather risk transfer solutions to shorten the risk to capital value-chain and source risk more directly from clients.

Alongside strategic partner Allianz Risk Transfer, Nephila has put its risk capacity behind many publicly announced weather risk transfer transactions, including the World Bank led $450 million drought-linked protection for Administración Nacional de Usinas y Transmisiones Eléctricas (UTE), the Uruguayan state-owned hydro-electric power company, in 2013.

Nephila also provides reinsurance capacity in the agricultural sector, protecting farmers against crop failure in places such as Africa, including through participation in the reinsurance program of the African Risk Capacity (ARC).

Many of the solutions provided in this complex area of the weather risk market are provided directly and this is a way to access weather related risk returns for the Nephila investment funds from outside of typical insurance market cycles.

Often, when the name Nephila Capital arises in insurance and reinsurance circles people think of catastrophe risk underwriting, for which it is still best known.

But the weather risk business has always been a key element of the Nephila offering and establishing Nephila Climate is a way for the firm to promote the weather risk operations and the holistic risk transfer or hedging they can provide to a broader audience.

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