Beauty is what you buy

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In an exclusive interview, Co-Founder Greg Hagood and Chief Investment Officer Jessica Laird of Nephila Capital, one of the world’s largest and longest-standing insurance-linked securities (ILS) managers, told Artemis that during the past six years of Markel Group ownership, the Nephila business is a “materially enhanced platform offering a broader suite of investment portfolios for its investors.”

Markel Group, a financial holding company with businesses across many diverse industries, completed the acquisition of Nephila in 2018.

With more than six years having passed since the acquisition, and Markel Group’s partnership being fully established with Nephila, it felt like a good time to speak with the firm about the changes to the platform.

“Markel’s strategy with acquisitions is closely aligned with Berkshire Hathaway, where they buy operating companies and let them run independently, while providing the parent resources necessary to help the acquired business thrive,” said Hagood, co-CEO of Nephila Holdings.

“Which means Nephila has kept its brand, independence and disrupter culture, yet has more tools at its disposal to enhance investor portfolios. Specifically, through Markel we gain access to a balance sheet for maximum capital efficiency in portfolio construction and for clear and timely liquidity solutions to side pockets & trapped collateral. Both tools are offered at in-house, strategic pricing levels that make economic sense for Markel, but also benefit investors versus what is available in the 3rd party market.”

Expanding on the support of Markel Group, Jessica Laird , told Artemis that to her knowledge, the firm’s structure is unique in the ILS space.

“Independent ILS mangers don’t have stable access to a parent balance sheet, which could impact their capacity, increase costs and limit the ultimate value provided to end investors. Traditional reinsurers have multiple constituents to serve, including rating agencies, equity capital and also off-balance sheet investors.

“Nephila is unique in being a true fiduciary and independently run, but with all the in-house resources of a rated reinsurer, which positions us optimally to serve our investors.

“We don’t write any catastrophe reinsurance for Markel and Markel doesn’t write catastrophe reinsurance at all. Thus, we don’t compete in the market or have any potential conflicts to manage.”

“We only act on behalf of our investors, as a true fiduciary. Yet we have the benefits of an integrated balance sheet for leverage in portfolio construction, with the ability to deliver fair & timely liquidity when investors want to leave,” explained Hagood. “In short, we believe investors like the attributes of a side car, but the fiduciary obligation of an ILS manager.”

Regular Artemis readers will be aware that since Markel Group’s acquisition, Nephila’s assets under management (AUM) have decreased, (although AUM is still sizeable at $7 billion as at September 30th, 2024) and the pair offered some insights into why this has occurred.

“In part this is related to the 2017-2022 catastrophe events that affected performance, where investors retreated from the ILS sector. However, assets under management is just not as relevant of a metric for us today, as our portfolios incorporate much more capital efficiency and leverage than pre-acquisition, allowing us to write more risk for our investors with less capital,” said Hagood.

Expanding on this, Laird said, “For example, the notional reinsurance limit we write today is larger than it was in 2018, when Markel acquired Nephila and AUM was at its peak. Our revenues are higher today as well, even though headline AUM is down ~ 40% since 2018.

Hagood further explained, “We understand that AUM is the metric league tables track, but our model has shifted to a balance sheet approach with more leverage and thus we need less capital to service our portfolios. Markel cares about revenues and profits, our trading counterparties care about our capacity in the market and Nephila cares about delivering the most value to investors, not having the highest AUM.”

Hagood added that, “Nephila is managing capacity tightly going into 2026.”

Since the acquisition, Nephila has also successfully expanded its non-catastrophe business, and Hagood and Laird stressed that Markel’s ownership and relationship has been instrumental in this success.

“They have a large involvement in our Climate business, where we partner with their expansive underwriting operation for distribution and balance-sheet access for various insurance lines relevant to the global transition to net zero. We also share various risks with them in our Specialty insurance business run out of our Lloyd’s of London platform. Both of these businesses are growing and are larger today than they were pre-acquisition,” Hagood explained.

To end, we asked the pair for their thoughts on the state of ILS today and how Nephila views the market.

“Obviously, cat bonds are mainly top layers and performed well during the tricky period of 2017-2022, and this happened to coincide with institutional investors increased need for liquidity in general. Cat bonds have thus been in favor. This approach has worked well and continues to be attractive on a standalone basis for investors,” said Laird. “That said, a lot of capital has flowed to that segment of the market and our view is there is a materially increased expected return available outside of cat bonds, for similar risk levels, for investors who can stomach 12 month liquidity instead of monthly.”

Hagood added, “We primarily work with existing and new investors on the best ways to harvest this incremental return and we currently see the difference in expected return for comparable risk levels are near historically high levels.

“Also, getting investors to consider these portfolio options has become easier since we now have simple solutions for liquidity when investors want to exit. With the uncertainty of trapped collateral addressed, investors can fully understand the trade-offs and make informed decisions on which approach works best for their needs.”

Read all of our interviews with ILS market and reinsurance sector professionals here.

Nephila leadership: Six years into Markel Group ownership, platform has evolved materially was published by: www.Artemis.bm
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As the insurance-linked securities (ILS) market continues to evolve, one of the most significant emerging areas is casualty ILS, and Jag Jass, Partner, Retrospective at reinsurance broker Augment Risk, argues that every casualty ILS transaction should also include built-in exit options with the legacy market to help expand and deepen that base.

Speaking to Artemis, Jass discussed what he believes the ILS sector can do to help support legacy players, both from a reserve risk standpoint and in terms of capital deployment.

“So, for us now, one of the biggest things in the industry at the moment is the emergence of casualty ILS. And if you look at what casualty ILS does, it is a way for investors to offset any property cat exposure or invest in a non-correlated asset by utilizing the float from longer term lines,” Jass explained.

“And fundamentally, we look at that in two main areas. I know Enstar touched on this with the forward exit option they put together, but on the back of every single casualty ILS transaction, we should be packaging up an exit option with the legacy market and growing that base, subsequently improving IRRs. It will allow that industry to grow. It will provide more risk capital to the industry, and it’ll provide a clean exit for the capital markets,” he added.

Taking it even further, Jass suggested that if you’re investor ready and looking at a casualty ILS portfolio with a tail of five to 10 years, primarily on lines like comp, GL, and you get comfortable with the risk exposure there, why wouldn’t you consider a legacy portfolio?

“You look at the permanent capital that has entered the industry in the form of private equity and other large institutional investors, in my opinion, there may not be a huge demand for that going forward, considering valuations of legacy reinsurers and the capitally intensive nature of the business , which is no secret,” he continued.

In terms of capital usage, Jass referenced how the hurricane season of 1992 catalysed the growth of property catastrophe and ILS and suggested that legacy in ILS could follow a similar path.

“But how do we bring ILS capital into the legacy space and almost say, look, if we can partner with some true capital markets and true institutional investors who are looking at a legacy book, able to diligence it, get comfortable with the exposure, they get the immediacy of the reserves to utilize the investment income, and they act as a nice alternative to some of the traditional players. And that’s not to say the traditional players aren’t doing a great job. That competition is always ripe.

“Off the back of that, if you’re an ILS investor in legacy, you underwrite the deal, after two-three years, you take on the exposure for four years, you earn the investment income on the float, and then once you’re in the real tail end of the business, a legacy buyer can come in and say, okay, we’ll novate this book off you. And we’ll utilize the claims management; we’ll take your operational burden. Again, it’s really factoring it in as part of the overall ecosystem.”

Of course, it all comes down to completing that first deal and creating momentum that could pave the way for similar transactions to follow.

As Jass explained, Augment Risk’s ILS team includes exit options through the company’s legacy platform in all the deals they place

“So, when we take legacy transactions out to market, we look at it in three different areas: traditional markets, your legacy markets, , and then you have the ILS markets. All three of these separate areas are going to carry different return hurdles and different metrics. So, there’ll be different views of risk, there’ll be different ways of structuring things.

“Now, personally, I know we speak about syndication in the legacy market all the time, but I am not sure it will happen. And mainly because, if you look at the bedrock of it, a lot of reinsurers want claims control, a lot of them want to alleviate the operational burden. And second to that, if you can go out and write a $100 million plus transaction, your shareholders may say, why do you want to share the risk? If we’re comfortable with the exposure, why wouldn’t we take this?”

Jass further explained how ILS can support legacy players from a reserve risk standpoint.

“If you look at a legacy players ca capital model, I imagine majority of this is their reserve risk. If you can bring in the casualty ILS market, and say look, we have the immediacy of the reserves here for you to earn a return on, it may be beneficial from a cost of capital standpoint

“It provides the legacy player with a capital benefit, and for the ILS market, it provides them with a consistent return on a seasoned book of reserves that they can get comfortable with.”

Jass concluded by highlighting the importance of the coming years for the convergence of ILS and legacy.

“The next three to five years, in my opinion, I think we’re going to see a real emergence of the ILS market in legacy. I think there’s going to be more participation. Enstar seem to be the market maker in some of these solutions, and with the forward exit option, I think that will become the norm. I think they would have become far more comfortable with greener risk, with more live underwriting, and you’re going to see things where you have trapped capital on property ILS transactions, where legacy can be used as a capital arbitrage tool to provide upfront liquidity to some of their cedents.”

Read all of our interviews with ILS market and reinsurance sector professionals here.

Casualty ILS growth calls for built-in legacy exit strategies: Augment Risk’s Jass was published by: www.Artemis.bm
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