Tough market but Nephila is still bullish on peak perils

The trend of cedants retaining more risk on their balance sheets does make things tougher for Nephila Capital, its chief co-founder told Monte Carlo Today, especially as they are largely retaining more cat risk.

But Frank Majors still sees opportunities for growth in the core target markets of the largest reinsurance fund manager of its type, which now has some $10 billion of assets under management.

“It is a tough market for everybody, there is no escaping that,” he said. “It is more competitive and cedants are retaining more, especially on the cat side. As we offer a cat product, that makes us less attractive—it is not a positive for us.

“We just want to engage with people and learn whether we can help them solve a problem. We cannot change the market. All we can do is focus on the people who really need our services.”

Majors said that a big driver behind cedants managing their cat books differently is simply the fact that they now understand cat risk better. Two decades ago, reinsurers invested heavily in gaining a better understanding of cat exposures and were able to sell their products to insurers on that basis, he explained.

“Fast-forward 20 years and insurers have simply caught up,” he said. “Insurers have bigger balance sheets and are much more confident in understanding and therefore retaining that risk. The industry must simply evolve and offer them what they do need.”

Better understanding

This greater sophistication of cedants also plays out in another, positive, way for Nephila. Majors said that their understanding of the different forms of capital available is much better and more nuanced than it was.

“I feel the market has increasingly accepted that the landscape has changed, which certainly makes things much easier for us,” he said. “They no longer see the industry as having two distinct business models—they have a better grasp of where we sit. That certainly saves a lot of time for us.”

He adds that while bigger cedants are retaining more, this is not necessarily true further down the spectrum, where Nephila can benefit as smaller cedants become more willing to use new solutions. “We get attention for the big deals we do but also do a lot of smaller deals. If someone needs cat capacity, we can help,” he said.

In such a competitive market—especially for cat risk—many reinsurers are seeking diversification into new lines of business or new geographical areas. Nephila is not. Majors said that despite the pressures on its core market, there is still profitable growth to be found.

“We see many areas where there is a need for capital in the sectors where we have a competitive advantage—and that is still in cat risk,” he said. “As long as you have a situation where government-owned Citizens is the largest holder of cat risk in Florida, we believe there is a place for us to grow.

“Launching new product lines and so on is not for us—we will leave that to the multilines. The reason people don’t buy more cat is because of the cost. The cost is determined by three factors: the potential losses, the cost of capital and the cost of distribution. While we can’t change the losses, we can influence the other two and that is why we believe there is still potential growth for us in these areas.”

Majors explained that the company’s biggest competitive advantage stems from the sources of its capital. While catastrophes such as Florida windstorm are regarded as peak risks within the re/insurance industry, these same risks represent only a small percentage of most of Nephila’s investors’ portfolios.

“We represent the channel to match that capital with those risks and the outcome is that we can provide cost-effective coverage,” Majors said.