Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Nephila focused on more direct route to original re/insurance risk


For Nephila Capital, the world’s largest insurance-linked securities (ILS) investment manager, being closer to the original source of risk provides value to investors in building a larger investible ILS universe and helps generate attractive returns.

After 18 years in the ILS market Nephila Capital has become the largest investment manager in the space, with current reinsurance and catastrophe-linked assets under management (AuM) exceeding $9 billion.

In recent times, developments in the insurance and reinsurance space have resulted in a highly competitive marketplace that has ultimately seen rates diminish and true profitability hard to come by.

This at a time when global interest rates are low, resulting in little opportunity for investment profitability, which has all contributed for a heightened need for capital efficiencies and the need to find underwriting opportunities in less competitive areas than, for example, the property catastrophe reinsurance space.

In response to this, and likely enabled by its substantial AuM and solid understanding of the secular and cyclical nature of insurance and reinsurance-linked property catastrophe markets, Nephila has increasingly looked to source risk in the primary insurance market as well as the more traditional ILS route, being reinsurance.

The trend has been underlined by Nephila’s increasing focus and ability to access and place its risk capital more directly behind both insurance and reinsurance business, according to Co-Founder and Managing Partner, Greg Hagood.

“We have about 150 people at our firm and certainly have the capability to see the risk in the insurance market and be closer to the original point of sale,” said Hagood.

“For investors, we started down this path about 3 ½ years ago and have built out a platform to see and analyse risk in the market and we feel that one of the biggest benefits to investors is having a larger investible universe,” continued Hagood.

With the reinsurance market remaining awash with capacity from both traditional, and increasingly third-party capital providers, getting closer to the original source of risk is one way in which firms can increase cost efficiencies, and generate additional returns, essentially shortening the distribution chain.

In a recent interview with Clear Path Analysis, Hagood underlined the benefit of being closer to original point of sale, “there are some cost efficiencies that can be gained and this is something that we are also focused on to benefit our investors’ returns,” he said.

To offset the challenging conditions in the global reinsurance market Nephila has become proficient in sourcing risk more directly, both from the reinsurance market but increasingly the primary insurance sector as well.

Nephila’s partnership with State National Companies, which sees the investment manager provide reinsurance capital to back property insurance business, its follow-form arrangement with Amwins, and its established MGA, Velocity Risk Underwriters LLC, all provide Nephila with a means to directly put more capacity to work.

By targeting the returns of the property insurance market more directly at times of reinsurance market depression, Nephila is able to adjust its portfolio in accordance to market conditions, which Hagood highlights as a key benefit for its investors.

“For example, there are times when reinsurance pricing is better than insurance pricing and vice versa. Thus, if we access the risk in both markets, we can tilt the portfolio accordingly and this will be of benefit to investors’ expected returns over time,” said Hagood.

Of course, the sheer size of Nephila and its longevity and experience in the ILS space, which has seen it become the largest single provider of ILS capital in the world, has contributed to its ability to access insurance risk more directly through long-standing relationships.

Furthermore, as the ILS space continues to claim a larger and larger share of the overall reinsurance space investment managers like Nephila could be presented with ample opportunities to expand further, into new, diversifying insurance and reinsurance exposures, ultimately benefiting investors and supporting ILS sector expansion.

The full Clear Path Analysis report can be downloaded by registering your details with Clear Path Analysis here.

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