Nephila taking disciplined approach to value creation: Markel’s Richie Whitt

Nephila Capital is taking a “disciplined approach to long-term value creation” according to Markel Co-CEO Richie Whitt, who said that the flagship insurance-linked securities (ILS) unit of the carrier remains on target for the year.

At the same time, Whitt has highlighted the important role Markel’s program fronting subsidiary State National has in Nephila’s operations, being the conduit of choice for a significant amount of the risk that the ILS fund manager picks up from the primary insurance market and through its MGA operations.

Interestingly, while Markel Corporation reported recently that its revenues earned from the operations of insurance-linked securities (ILS) and reinsurance investment manager Nephila Capital rose again, reaching an impressive almost $125 million year-to-date, Whitt’s comments suggest that this could have been even higher.

“While the overall operations are profitable, the impact of purchase accounting adjustments on operating expenses and lower than anticipated management fees, with associated delayed fee recognition on side-pockets arising from the 2018 catastrophes, negatively impacted reported performance,” Whitt explained on Nephila.

Which suggests that absent major losses and once issues related to side-pockets from prior year events are fully resolved, Nephila Capital should be delivering even higher revenues back to Markel, paying back its investment even more rapidly.

Whitt continued, “Shifting through the noise caused by these items, Nephila is broadly on target to meet our expectations from the beginning of the year and continues to take a disciplined approach to long-term value creation.”

Increasing revenues from Markel’s ILS operations have been offset by costs related to Markel CATCo, but those costs appear to be diminishing now, allowing Nephila’s results to boost Markel even more.

As well as Nephila Capital alone, Markel is also pleased with the way its ILS investment manager’s activities work in tandem with its program fronting specialist unit State National.

“We continue to be pleased with the progress we’ve seen from our State National and Nephila operations,” Whitt explained.

Adding, “State National continues to prove strategically important to Nephila and our overall ILS strategy.”

Here the acquisitions of State National and Nephila Capital have provided Markel with the ideal platform to transform not just reinsurance risks, but also primary insurance, into investable assets for third-party investors.

Nephila’s expertise at sourcing risk in numerous ways, from as close to the point of origination as possible, are helped dramatically by State National’s program fronting reach.

Nephila’s use of State National had already helped it create a more efficient pipeline through which to match its investors capital with catastrophe and weather risks.

Now Markel owns that whole pipeline, alongside others it had already created itself and the other routes to risk Nephila had developed.

So, it will be interesting to see how this develops over time, as the risk flowing through these pipelines to Nephila’s funds increases in volume and profitability, as well as how that adds additional revenues for Markel going forwards.

This has the potential to represent value creation of the highest order, for Markel and also likely for the investors backing Nephila’s funds.