Don’t kill the Golden Goose: Frank Majors, Nephila Capital

Insurance and reinsurance firms should not take it for granted that capital will flow into the industry in the aftermath of another major loss, thinks Frank Majors, co-founder and principal of Nephila Capital.

The capital reload of 2018 was a success story for the ILS sector, but the industry should not take it for granted that capital will rush back in should major losses occur between now and year-end.

Speaking to Artemis on the eve of the Rendez-Vous de Septembre about the recently announced blockbuster tie-up between Nephila, the largest insurance and reinsurance linked securities (ILS) fund manager, with Markel Corporation, Majors said the lack of significant rate hardening in the aftermath of last year’s trio of hurricanes and other natural catastrophes could put off some of the more opportunistic capital in the future, while loss creep has been another issue.

“Some of the capital that came in was opportunistic and perhaps those investors were not rewarded with the returns they were hoping to achieve,” he said. “So if there was a lot of activity between now and year-end I would be more sceptical about the opportunistic investor base.”

“I do think there’s a deep market that will flow in because they like the investment as a strategic long-term holding, but rushing in, in a one-month period like we saw last year, it might be harder to reload in the short-term,” he added.

Loss creep is also likely to be an issue for some ILS investors, he said.

As previously reported, just four Floridian primary insurers have revised their initial Hurricane Irma loss estimates up by over $1 billion over the past 12 months.

“Some have reserved for it and some haven’t. That sort of creep is really an equity-type risk that needs equity-type capital, and if that’s the case then it needs an equity-like return. You can’t ask investors to accept a non-correlated bond-like return and introduce equity-like risk.”

The insurance and reinsurance industry’s inability to “get a handle” on claims has “real consequences”, warned Majors. “The industry was slow to learn the lesson of the power of alternative capital, but one concern now is have they now learnt it too well and overshot the mark on what we can expect from this investor base?”

“We’ve got to make sure that the industry doesn’t overreact and think it can reload no matter what happens as far as loss activity, negative surprises and loss creep is concerned. If the industry can’t take care of that, blocking and tackling in a way that satisfies the investor base, you can kill the Golden Goose.”

Majors was upbeat about the agreed merger with insurance giant Markel, praising the carrier’s platform and track record with other mergers, including its 2015 acquisition of ILS retro provider CATCo.

“We can accelerate our strategic plan and maintain the independence that we want and our investors demand, so it seemed like a no-brainer once we found the right partner.”

“Undoubtedly it’s another step along the path of convergence as we work with Markel but whether this is another step in the process, or it’s a quantum leap, is going to depend on our and Markel’s ability to find ways to improve the overall value chain. It’s got to make sense for our investors and it’s got to make sense for Markel.”