ILS “one of the most important strategic moves” ever for Markel

Markel Corporation is “incredibly optimistic” about the potential for its insurance-linked securities (ILS) business to drive growth and profits for the firm.

Markel began to build its in-house ILS and collateralized reinsurance platform with the acquisition of the retrocession and reinsurance investment focused CATCo business in late 2015.

Then in 2017, Markel Corporation acquired the fronting and program service insurance specialist State National Companies, which had become a key facilitator to ILS funds and capacity.

Markel then followed this up with the acquisition of the largest ILS fund manager in the business Nephila Capital last year.

The company had immediately said that the acquisition of these three businesses were seen as a game changer for Markel, offering it a significant stake in the growing ILS market and the ability to offer clients a widening array of products offerings.

The view remains, that Markel has put together a key stake in the ILS market and boosted its own ability to provide client service through this new focus on underwriting for and transferring risks to investors from the capital markets.

Of course, one of Markel’s investments in ILS, Markel CATCo, has been particularly hard hit by the significant catastrophe losses of recent years given where it provides its capital in the tower, with a resulting inquiry and executive departures also adding challenges for the firm.

But Markel said recently that it plans to adapt the strategy based on its learnings from the 2017 and 2018 catastrophes, aiming to continue trading forwards under that brand.

The company provided another view of the importance it places on its investments in ILS and the growing ILS focused platform it has created in its recent shareholder letter.

Markel said that its multi-year and multi-acquisition strategic entry into the ILS business is beginning to pay dividends and now means the firm has “assembled the largest single entity that participates in the Insurance Linked Securities market.”

The company explained just how quickly the ILS business has delivered tangible benefits to the bottom-line, saying, “The change in the scope and scale of our Insurance Linked Securities (ILS) operations over the last five years is the most dramatic of all. Five years ago the revenues of our ILS business were $0. In 2018 they were $92 million.”

Markel said that it is, “Incredibly optimistic about the future of this business and what it means for Markel as a whole.”

Markel said that it continues to fully cooperate with authorities on the investigations into Markel CATCo loss reserves recorded in late 2017 and early 2018.

Adding that, “We continue to investigate the issue, and we retained first rate outside advisors to conduct a fulsome inquiry into the matter. As of this writing, the investigation remains ongoing. We will report on the outcomes of the investigation when it concludes.”

The company seems determined to develop a leading role for itself in the ILS and collateralized reinsurance market, highlighting both the risks and the rewards that such a strategy can bring to it.

Markel explained, “We are confident that our efforts in Insurance Linked Securities will prove to be a valuable and important strategic pillar of our operations at Markel.”

Adding that, “We will learn, and we will adapt as necessary, to make our ILS operations a key contributor to our results over time.”

Markel explains the mechanics of the ILS market as well as the motivations for ceding companies, investors and itself, as a leading ILS manager and facilitator.

The company is clearly bought into the significant role that ILS and the capital markets will continue to play in insurance and reinsurance going forwards, seeing the potential growth of the ILS sector as becoming a key revenue driver for Markel.

“The world continues to demand better, faster, and cheaper solutions to all problems, and the ILS market addresses that dynamic for insurance products,” Markel said.

Saying that despite the significant catastrophe losses suffered over the last two years and the impact this had on some ILS strategies, “We believe in the future of the ILS market and that the results will balance back out towards a more sustainable equilibrium.”

Markel said that it recognises that, “CATCo’s initial estimates for the catastrophe losses of 2017 and 2018 proved to be too low,” saying that this meant, “The losses to investors on CATCo products have exceeded initial estimates.”

But Markel reiterated its commitment, saying, “Going forward, we are revisiting and reexamining the processes and elements that go into the setting of reserves, pricing decisions, and actuarial matters at CATCo. We remain committed to operating with complete integrity and to the very best of our ability.”

Markel believes that ILS will continue to be, “an important element of our long term platform.”

The companies acquisition of Nephila Capital and that ILS managers long-term partnership with other acquisition State National, is another area where Markel sees growth potential and an ability to lead.

In addition, Markel clearly wants to broaden the range of risks that are underwritten by ILS capital, as it looks to find other synergies between its acquisitions and the rest of its businesses.

“We are delighted with the early months of Nephila joining Markel and we believe that the combined platform of Nephila, along with State National, along with CATCo, along with our existing reinsurance operations, gives us the number one market position to meet the needs of buyers and sellers in this arena,” Markel explained.

Markel said that thanks to its acquisitions it already offers the “broadest based, most comprehensive marketplace” for addressing insurance and reinsurance risks through ILS solutions.

Expansion is clearly on the cards, as Markel says, “We expect to continue to increase the percentage of risk transfers that might be suitably addressed by the ILS mechanism.”

As a result, Markel expects ILS to become an increasingly important strategic lever for the firm, and as synergies are found and grow, while the challenges at Markel CATCo are addressed, the company sees its foray into ILS as key to its future.

“The ultimate size and scale of this idea could be one of the most important strategic moves we’ve ever made,” Markel said.

But it’s been a learning experience so far and that will likely continue.

Markel explained, “Today, we know more about how to price and describe risk in this marketplace than we did yesterday. We’re more sensitive to hidden or previously unthought-of correlations that can cause events to cluster in ways that they did not in the past. We’re more sensitive to the implications of climate change, and how that might increase both loss frequency and severity along with more correlation of previously uncorrelated events. Our predictive models, both within Markel, and those available from industry sources, are more robust now that they’ve been tested and modified based on the experiences of 2017 and 2018.

“And, the prices for transferring these risks are higher in 2019 than what they’ve been in the two previous years. Higher prices help while learning.”

It’s clear that Markel places ILS as a key strategic pillars for its future growth and sees the important and evolutionary role that ILS will continue to play in insurance and reinsurance markets, as efficiency of risk transfer becomes increasingly vital.

Looking ahead the firm says, “We expect 2019 to be a year of improving and expanding our product offerings for the benefit of buyers and investors as we continue to build a robust and important platform for the future.”

As Markel Corporation beds in its ILS acquisitions and finds new ways to leverage them alongside its traditional insurance businesses, the use of capital markets money within its underwriting could expand significantly and the revenue the ILS operations will drive has the potential to become a key source of earnings growth.