We made a big bet but Markel-Nephila tie a glimpse of the future: Jed Rhoads

Markel has “made a huge bet” in acquiring Nephila Capital based on an instinct of how the risk transfer landscape will change in the long term—but the company that emerges from the deal will be much greater than the sum of its parts, Jed Rhoads, president and chief underwriting officer, Markel Global Reinsurance, told Monte Carlo Today.

Markel stunned the market the week before the Rendez-Vous when it revealed it would acquire Nephila Capital for an undisclosed sum, becoming the largest manager of funds in this sector in the process.

Between Nephila and Markel CatCo, its assets under management will stand at approximately $19 billion, representing approximately 20 percent of the insurance-linked securities (ILS) sector.

Rhoads said that when thinking about the deal, Markel considered the question of what the risk landscape might look like in 2025. “We looked at what pieces of the puzzle we had and what we would need,” he said. “The market is changing; it is clear ILS and alternative capital are here to stay and they would be heavily integrated into any future model of risk. It was on that basis, we did this deal.”

He acknowledged that there will always be uncertainty in doing such a deal—but added that it is an informed decision that feels right.

“We have made an enormous bet in the ILS space but I am proud of what we have done,” he said. “We did CatCo three years ago, so we were already in this space, but Nephila gives us a much bigger reach. Nephila was the original pioneer in this market and remains the pre-eminent company in it. Its founders created something unique, with a good reputation and of a remarkable size.

“Our view is that the industry has to learn to deliver capacity and capital in the most efficient fashion possible. This now gives us yet another platform to ensure we can continue to do that in the long term.”

Richard Whitt, co-chief executive of Markel Corporation, added: “We saw with CatCo and now with Nephila the opportunity to be a leader in that space. There are not many opportunities in the insurance and reinsurance business to pick up a leadership position as quickly as we have.

“We want to build out Markel’s capabilities across the insurance and reinsurance landscape.”

Nephila will complement Markel’s existing ILS offering from Markel CatCo, which it acquired in 2015; its extensive global insurance and reinsurance operations; its US carrier State National, which it acquired in 2017; and Markel Ventures, which invests in companies outside the re/insurance industry.

“The combination of all that is much greater than the sum of its parts,” Rhoads said. “We can deliver capacity in a much more efficient way and ensure we remain relevant right to 2025.”

“We want to make sure we have the capabilities and the products that our customers need and, as much as possible, be a one-stop shop.”

He noted the deal is also significant against a backdrop of the ILS sector growing faster than the traditional reinsurance sector. Markel is now in a pre-eminent position to benefit from its potential, he said. “This puts Markel in a really good position within the ILS market,” Rhoads said.

Whitt added that the company expects this trend to continue. “We believe that ILS’s growth trajectory will be higher than that of the traditional side for at least the next several years,” Whitt said. “It is going to become a bigger part of the market.”

Pension funds and endowments are increasingly adding uncorrelated risk to their portfolios and are bringing new capital to insurance products, Whitt explained. “The interest is there on behalf of capital providers,” he said.

Rhoads added that on the customer side, ILS funds’ lower cost of capital enables a lower return profile for investors. And there are many stakeholders interested in diversifying into other types of risk other than cat. “ILS funds are lean operators,” he concluded.