Markel Corporations relationship with its market-leading insurance-linked securities (ILS) fund manager Nephila Capital has deepened in recent months, as its insurance business began acting as a distributor for Nephila’s capital, ceding catastrophe exposed insurance business to the manager.
Markel acquired the largest manager of catastrophe and weather insurance and reinsurance linked assets Nephila Capital in the fourth quarter of 2018.
Already the owner of program business and fronting specialist carrier State National, which is one of Nephila’s routes to the primary insurance market, Markel has now added another route to risk for Nephila, becoming a distributor of its investor capital by fronting risks through its primary insurance business as well.
Speaking during the Markel fourth-quarter earnings call yesterday, Co-CEO Richie Whitt explained that momentum is building in terms of strategic synergies between its burgeoning ILS business and the parent company.
He highlighted an example that sees, “Markel and Nephila collaborating, to help Nephila execute on its strategic goal of deploying capital into the primary insurance markets at low cost, to increase returns for investors.
“Nephila accomplished this recently, leveraging Markel’s infrastructure and capabilities, by allocating capital to support Markel’s growth in the primary insurance market.”
Of course this isn’t just a pure fronting arrangement, as you’d typically find an ILS fund manager entering into.
In this case, as Markel is the parent organisation, leveraging Nephila’s investor capital to build out its own insurance book in a more sustainable manner is a key driver, hence the benefits flow to both parties, as well as Nephila’s investors in the additional route to access risk.
Whitt continued, “Nephila’s investors are rewarded in the form of reduced underwriting expenses made possible by Markel Insurance economies of scale, with quick and broader access to the improving property insurance market.
“Markel’s insurance operations benefit by becoming a more strategically important trading partner to our broker, while managing volatility on our balance sheet.”
Markel’s other Co-CEO Tom Gayner discussed the initiative in more detail, explaining that it is hoped this becomes a meaningful pipeline for originating insurance business and flowing it back to Nephila’s ILS funds and investors.
“What we’re doing is basically working as distribution for Nephila, in this case to commercial wholesale and retail property business. That deal was negotiated at arm’s length between our Markel folks and the Nephila folks and we’re hoping over the course of the year that it could send $50 million to $60 million of property premium over to Nephila and that is basically pure cat premium. When I say pure cat premium, its hurricane and earthquake premium.
“That is the risk that they are looking for and that their investors are looking for.”
So that’s the benefit for Nephila and its investors, but for Markel it’s a way to access the capital markets more directly in support of growing out its own insurance business while better managing the risks that business generates.
“We actually, in terms of Markel’s balance sheet, are looking to manage the volatility, so this is an example of a win-win.
“We can get them (Nephila) low cost access to that business using our distribution capabilities and protect the Markel balance sheet, reduce the volatility,” Gayner explained.
He also added that there are cost savings to be had as well, as Nephila can provide a dedicated pipeline to reinsurance capital for Markel.
Gayner said, “My broker friends will probably be upset at hearing this, but we don’t have the brokerage costs in the middle of that. So it’s a nice win for both sides.”
Asked about the fees Markel might earn from fronting and ceding primary catastrophe exposed property insurance risks to Nephila, Co-CEO Whitt said.
“We’re basically paying them across the pure premium, at a multiple for those risks, and we’re taking a 4% front fee, which is what they pay State National for that fronting arrangement. So as you can see it’s pretty low cost to the Nephila funds.”
It’s a natural progression of the relationship between Markel and its in-house ILS fund manager Nephila Capital, bringing added efficiencies to both of their business models, while reducing costs and better managing exposures as well.
These synergies Markel is discovering through its ownership of ILS focused businesses like Nephila, as well as State National and its core role in the investment managers routes to risk, are still building and likely have much further to run.
“I’m excited to report that there are additional initiatives already underway and in the pipeline,” Whitt said.