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Nephila: eyeing new markets, new models

Channels: Corporate, Markets

Companies: Nephila Capital

People: Barney Schauble

Nephila Capital is raising new capital as it eyes weather hedging opportunities in renewable energy and disruption in cat risk insurance underwriting. Barney Schauble talks to Environmental Finance

It’s been a challenging year in reinsurance – how has the catastrophe risk segment held up?

Barney SchaubleThe reinsurance market in general is under a lot of ongoing pressure from different directions, including softening pricing, new companies forming and merger activity taking place – the landscape is changing. Certainly, we’ve seen pressure on pricing in catastrophe risk, which is traditionally the major profit engine for the industry. But pressure has been even greater in other segments such as casualty, aviation and energy as firms seek to diversify their exposures.

Relatively speaking, cat risk has held up well and was always more profitable than those other sectors. And it has also, once more, demonstrated that it’s not correlated with other markets – we particularly saw that during the broader market volatility in the third quarter of 2015. If you can generate a meaningful, single-digit positive return that isn’t correlated with other financial markets, that’s very interesting for the institutional investor community.

It’s also been another year without a major catastrophe event – is there a danger that investors in cat risk might become complacent?

Certainly, the continued absence of a major catastrophe is unusual. It can’t be expected to continue – and at some point, you will pay losses. We make that very clear to investors: there will be some years when you pay out more than you take in premium income. Smart investors understand that.

Does this mean it’s a case of battening down the hatches for Nephila?

No. Over the last few years we’ve sought to keep the assets under management steady between $9 and 10 billion, and that approach has been supported by our fund investors and our shareholders. But we see some specific opportunities, so we’re planning to open up the fund to additional capital this year.

Where is that opportunity presenting itself?

Both in property risk and in weather risk. We executed a number of hedging transactions for wind and solar farms last year, following on from deals we’ve done in large hydro, such as the precipitation hedge with the World Bank for the Uruguayan government. Growth in renewable energy activity is generating opportunities to deploy additional risk capital in the weather space. Historically, weather hedges were used to manage changes in demand for energy – now, it’s about the supply side as well.

We were also involved in the African Risk Capacity transaction, providing drought protection to farmers in nine countries. It’s an important signpost in the development of the weather market, and it demonstrates how parametric weather risk transfer products can be applied – we’re part of a taskforce at Lloyd’s specifically working on how to develop risk capacity for emerging market weather and catastrophe risks.

You’ve also launched Velocity Risk Underwriters last year – what was the thinking behind that?

In other parts of the financial markets, we’ve seen the emergence of new ways that risk moves through the system. Take credit as an example: whereas those looking for a loan would traditionally have to go solely to banks, technology now provides access to new sources of capital, whether through peer-to-peer lending, hedge funds, direct lending by investors, etc.

In the insurance market, if you look at how the individual home or business owner buys property protection, and how that risk flows through different intermediaries and capital sources, that chain hasn’t changed much over the last 50 years. What we’re starting to see in insurance is an exploration of using technology to find more efficient ways for risk to find its way to capital – and Velocity is a component of that, in that it offers a more direct means to bring together risk and capital. We have been working with a range of external partners on this effort as well.

If someone builds a new hotel in Louisiana, say, it’s not obvious that they can go and get the primary insurance protection they need to get. There are people with flood exposure who can’t get protection – perhaps for regulatory reasons, or because each insurance company only wants a certain amount of exposure at any one address. If you can augment the existing insurance business model with new ways for that risk to find its way out, there’s an opportunity there.

So what’s on the cards for 2016?

We’ve been hiring on the technology side of the business. Investors are paying for a service, and simply buying catastrophe bonds isn’t really a service, it’s something most investors can do themselves. They want insight, perspective and the best judgment, and we want the tools and the systems to be able to offer the best institutional investment platform for our market. The future of the industry is going to be driven by technology development, including data visualisation, exposure validation and a number of other ideas. We’re big believers that technology will matter more and more, especially in a business that’s changing as much as insurance and reinsurance.