Insurance-linked securities (ILS) is seen as one of the cylinders of the insurance and reinsurance engine for Markel Corporation and the firm’s CO-CEO’s Thomas Gayner and Richard Whitt see ILS driving “increasing advantages and profitability” for the company with its leading position set to help it scale in the space.
Having acquired first retrocessional reinsurance ILS fund manager CATCo in 2015, then program and fronting specialist State National in 2017 and most recently the largest manager of catastrophe and weather insurance and reinsurance linked assets Nephila Capital in 2018, the ILS cylinder has become a key component of Markel’s business and it is the largest single manager of third-party ILS capital as a result.
Markel has also added another element to the ILS cylinder more recently, with the launch of Lodgepine Capital Management in 2019 as a new retrocessional reinsurance fund manager to keep its participation in that piece of the collateralised market after its Markel CATCo division fully runs-off over the coming year or so.
Despite the challenges associated with its CATCo purchase, Markel Corporation sees ILS as part of its future DNA, recognising the importance of being able to offer its clients capacity from across the risk-return spectrum and the benefits of doing so, in lower capital costs and reduced volatility from catastrophe and severe weather events.
Markel’s Co-CEO’s Gayner and Whitt cites the ILS acquisitions as “transformative” for Markel and while challenges emerged, the company remains focused on monetising the benefits of its stake in the ILS market.
“While the learning curve has had unexpected and painful bumps along the way, we believe the advantages for Markel will continue to accelerate and grow over time. We are proceeding through the learning curve. We expect increasing returns from our ILS operations over time,” Gayner and Whitt explained.
The pair believe that as the world becomes increasingly technology driven, the insurance and reinsurance industry will need to become “better, faster and cheaper” as has been seen with so many other disrupted sectors in recent years.
“For every product and every service, at every time and everywhere, all businesses need to figure out how to be Better, Faster, and Cheaper. If any given business can’t figure out how to do so, a competitor will,” the Co-CEO’s of Markel said.
“It is in the DNA of Markel that we innovate and adapt. ILS and our efforts in this arena, stand as a paramount example of how we are attempting to compete effectively in a changing world,” they continued, highlighting the key role of ILS in Markel’s future.
With ILS it comes down to being able to offer its products more efficiently and cheaply for Markel, by incorporating third-party capital providers within its business model.
The Co-CEO’s explained, “You might ask, “What is better, faster, and cheaper” about this? The answer is that the speed and quality should be roughly the same but it should be cheaper. The returns demanded by the external investors are different than those we expect on our own capital. Often they are lower. The outside investors tend to focus on those returns not being correlated to the returns of other assets as well as the absolute level of returns themselves.”
But what’s in it for Markel and its shareholders?
Gayner and Whitt highlight that, “Through the ILS mechanism we can earn excellent returns as managers of the process rather than through the provision of our own capital.”
Following the issues with Markel CATCO, the company has “adjusted our pricing, and our appetite to write this business, to reflect this difficult experience,” the Co-CEO’s said.
Adding, “We’ve also developed additional tools to participate in this necessary market that should provide appropriate returns and risk management for Markel.”
On the recent years of catastrophe losses, the hit to Markel CATCo and the change in investor appetite seen over the last year, Gayner and Whitt are convinced the ILS market will bounce back and return to growth.
“We believe the disruption in ILS is a temporary circumstance. In the long run, we continue to believe in the ILS mechanism and its ability to provide better, faster, and cheaper insurance solutions in many circumstances.”
Looking ahead, the Markel Co-CEO’s expect the position they’ve built in the ILS market will continue to benefit their company.
“We expect ongoing consolidation in the ILS industry. We expect advantages of scale to become more and more important. Large and sophisticated investors need large and sophisticated counterparties to design, process, and execute various strategies for the growing array of ILS “alternative” assets. We are the leading company in this field and we expect to enjoy increasing advantages and profitability from that position over time,” they explained.
“Our operations in ILS address another strategic imperative at Markel. Namely, we want to be able to seamlessly provide any insurance customer with solutions that meet any specialty insurance need from soup to nuts. As we continue to develop the ILS mechanism to operate in more and more realms of the insurance world, we will continue to offer wider, deeper, and broader, products to our insurance customers in a seamless, better, faster, cheaper way.”
Markel sees new opportunities as likely to emerge from its activities in the ILS market, as insurance and reinsurance increasingly looks to the capital markets and the company can leverage its broad expertise and service offerings to take an increasing share of that convergence marketplace, as it becomes the norm.
“We own and operate the leading ILS platform in the industry. We’re just getting started in this world and the addressable market is immense,” they explain.
Highlighting opportunities for ILS expansion and growth, “Weather and climate related risks are well suited to be addressed via the ILS market. Markel possesses unique opportunities to act as a dealer in the secondary market for ILS securities already in existence. ILS should also be well suited to expand beyond the original markets of large property catastrophe risks as the sector matures and learns to process longer tailed liability risks. The list goes on and on.”
Summing up as to why ILS is so important for Markel and the Co-CEO’s Gayner and Whitt see ILS as part of the future of insurance and reinsurance, the pair said it can make them better and their products better all to the benefit of its customers and shareholders.
“Our ILS platform makes the rest of Markel better by broadening the ways in which we can serve our insurance customers. It makes us a better and more skilled company that can do more for existing and potential customers.
“Markel also makes our ILS businesses better by providing a stable and consistent ownership base from which the employees of those businesses can continue to expand and grow. That circular and virtuous circle between our various business units has and will continue to produce financial benefits for our shareholders. Win-win-win.”