The manager developed a solution that pools the side-pockets from multiple historical deals and events into one fund, creating a single development class.
This approach leveraged the diversification benefit across multiple side-pockets, allowing for the vast majority of the held capital to be released to investors.
The investors who opted in became holders of the new, single share class and were able to redeem or reinvest significant amounts of their remaining holdings.
This meant Nephila’s fee income rose in Q3 as it recognised the side pocket release.
Nephila’s parent Markel provided a remote-risk adverse development cover to assist in settling the transaction, although the firm emphasised that it was the pooling mechanism that was more critical to achieving the capital release.
The manager will also offer a similar exit mechanism to future investors in its funds.
Commenting on the period of losses from 2017 that led to significant side-pocketing of investor capital, Nephila co-ceo and president Frank Majors said: “It has been a really difficult six years which has tested the base investment structure of the ILS market.
“There is a trade-off for investors between time and certainty of precise value. Six years ago our investment products placed a very high premium on precision, with a corresponding cost of greater time for capital to be freed up.”
We want our investors to continue on our platform because we treat them well, not because capital is trapped or because we want so-called ‘permanent capital’
Majors emphasised that, going forward, Nephila wanted to offer investors more options, even if they chose not to take them up.
“We want our investors to continue on our platform because we treat them well, not because capital is trapped or because we want so-called ‘permanent capital’.
“Our whole business model is predicated on the idea that it's not our capital and it's our role to act as a fiduciary for that capital. Getting the capital back to providers as quickly and effectively as we can is a big part of that fiduciary responsibility.”
He added that Nephila is confident that its overall reserving track record would allow exits to be made at levels that made sense, as it had experienced both positive and negative development on separate events over time.
Optionality to deploy
Majors added that getting money out “should not be a concern for investors” in choosing their options to deploy within ILS, at a time when one of the reasons driving an investor flight to cat bonds has been the perceived liquidity on offer in that segment.
Cat bonds might be the preferred option for some investors for other reasons regarding their risk tolerance, he noted, but Nephila wants to make sure its investors are clear on their objectives and tolerances before simply defaulting to the cat bond market.
Nephila wanted to be able to say to investors that they could make private ILS holdings work better for them, rather than giving up yield simply for structural concerns, he added.
“Cat bonds make a lot of sense for many investors, but by addressing exit concerns, we can make a lot more strategies make sense for investors who would otherwise feel limited in their choices.”
Majors added that November 2023 marks the five-year point from when the firm’s acquisition by Markel was completed, and said this latest move demonstrated why the ILS firm had looked for a carrier to join with in the first place.
At the time, Nephila co-CEO Greg Hagood said the firm’s new parent brought “joint resources” that could be “leveraged on behalf of our investors in the years ahead”.
Markel acquired Nephila for $975mn in August 2018, when its assets under management were $12bn.
