Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I've been studying Markel for a few years and am always curious to understand how the business works, what they're buying, how they're looking to grow the company, etc. I realized they bought a pretty interesting business years ago in State National. I'm trying to understand more about the history there, the fronting business more broadly, and any views you have on Markel's ability to run State. A good place to start would be when, how, and why you joined State National?

I joined in the year 2000 and spent almost 18 years there. I was the only marketing person they had. My background was in advertising and marketing communications firms, but always in business-to-business. That's what appealed to State National because there are two divisions; lender services, which is basically collateral protection insurance, and then program services, which was basically fronting, though that was barely off the ground at the time. That sells to other insurance companies and the CPI sells to financial institutions. So they were strictly a business to business company where nobody had ever heard of them.

So they realized that they were growing, but they looked amateurish in their advertising, their proposals, their presentations and things like that. So I was there for all their growth. Basically, both sides of the business quadrupled in premium and business profitability, employees, everything, while I was there for the 18 years.

Could you share a bit of background on how and when the fronting even came into existence? What's the story?

They started the company as a managing general agency because Lonnie Ledbetter, the founder, before he brought his two brothers into the business, came out of the Navy and started working with his uncle. One of the niches they found as an agency was collateral protection insurance. They would go to banks and explain the need to protect assets for all auto loans and ensure that these loans maintained current insurance for the life of the loan. Initially, they managed this manually. But it was an insurance product, so they had to work with a local insurance carrier, which was somewhat of an anomaly in Texas. They were called Texas county mutuals, and there were only about 30 of them in Texas. They were frozen, and no more were created. They had a lot of freedom to write business with their own rates outside the Texas Department of Insurance. Lonnie Ledbetter became frustrated with his profits being consumed by the insurance carrier when there weren't many claims. It's a low tail, low severity business.

The CPI business, you mean?

Yes, the CPI is very small. I mean, the average claim even now is only around $2,500.

Just to clarify, Lonnie would go to a bank and say that they need to insure all these loans for people buying cars privately?

Yes, right. Because if the cars get damaged and need to be repossessed, the bank could lose a lot of money. We can track it and force place insurance on the borrower to protect the financial institution. There's really no benefit to the borrower, but if they let their private insurance lapse, the bank, through the collateral protection insurance provider, will intervene and then force place insurance on them.

But it's insurance against what? If I have a car in Texas, I'm legally obliged to have insurance. So, is it insurance against me breaking the law?

No, it's insurance that covers if the borrower has a $30,000 car loan and lets that insurance lapse, then damages or totals the car. There's a good chance they won't pay anything, and the bank will be out $30,000 on the loan. If we force place insurance on them and the car is damaged or disappears, which happens quite a bit, called a skip, then State National would pay that claim. If they take it to auction and the repossessed cars are all beat up, that insurance would make them whole. So, the lending institution pays nothing; the borrower pays it all and it does not include any liability insurance for the borrower. It's really one-sided and very expensive.

So why is it such a low average claim of $2,500?

A bank will repossess a car and we'll pay for any damage, anything that isn't covered if it has a collateral protection insurance policy placed on it. We would pay everything to make it basically whole, to make it a pristine car if they sell it at auction.

Based on a Black Book value?

Yes, Black Book or a combination of wholesale versus retail value. There are different ways of doing it. Sometimes a car will be totaled, and the borrower will just disappear or throw his keys on the bank officer's desk and say, "I don't have any money and I don't have a car, so it's your problem now." Or a borrower might say the car has been stolen when it hasn't. So, we hire what we call a skip tracer, someone who can try to find that car. But if we can't find it, we pay the claim to the financial institution. That's how it started growing. We then bought a county mutual insurance company to eliminate the middleman.

Because the CPI policies are profitable. Is that why?

Yes, exactly. Throughout the time I was there, the insurance carrier maintained a 10% margin, and the CPI provider that was doing the loan tracking and servicing of these loans was also making a profit, at least a 10% margin. There was plenty of money in there. State National loaned the Texas-based county mutual insurance carrier and the CPI servicing aspect of it, the one tracking all the loans, sending notices to borrowers saying, "You better have insurance and it better be the correct insurance. You better have the financial institution listed as the lienholder and you can't have any lapse in coverages or we're going to place insurance on you and you are not going to like it because it's expensive and it protects your lender, not you."

So, we just kept growing and growing that business as it became more automated. Then Terry Ledbetter, who was working with Lonnie and is 10 years younger than Lonnie, started looking into the capacity that was in the county mutual insurance company that we owned and said, "We have enough equity in this insurance company that we could really be writing another $1 million worth of insurance because if you write $1 million dollars' worth of insurance, you need pretty much capital and surplus in the bank of $200,000, 20%." We basically said this insurance company has capacity. Could we lend it out? Could we do fronting? We just dabbled in it little by little.

Then, the decision was made by the Ledbetter brothers that said, "We can't afford to take any risk. If someone wants to borrow our licenses and authority in the state of Texas to write for that, we have to just charge them a ceding fee, maybe 5% of the premium, and let them take all the rest of the risk. We couldn't afford a big loss. There was capacity there, but we didn't want to do that." Then all of a sudden, we started evolving more and more and found an opportunity to buy an insurance company that wasn't confined to the state of Texas. It was a dormant shell of a company that we investigated, made sure there were no skeletons in the closet, and we renamed it State National Insurance Company, and slowly but surely added capital to it.

At the same time, they stuck with their business model. It said, "We will take no risk." And now, all of a sudden, we're getting fronting opportunities outside of Texas at the same time. And then we spent 10-15 years buying more insurance companies or developing more insurance companies, but just painfully going through every state Department of Insurance, trying to get authority to write different product lines. So you can imagine there are probably 20 or 30 lines of insurance in each state, and we would have to slowly but surely fight for each product line to be authorized, one line of insurance at a time. So we spent years and years and years doing that.

So why is it so difficult to get a license then? They were originally in Texas, so you mentioned there were only 30 licenses, is that correct, for people that could write insurance?

No, there are about 30 different product lines in insurance, such as inland marine, commercial auto, private passenger auto, and workers' compensation. To get authorized in the state of Louisiana, which is next to us, we had to make specific applications for that, like for workers' compensation.

But originally in Texas, why didn't these insurance carriers come in and write it themselves rather than using you as a front? What edge did you guys have in Texas that made it possible?

There were other companies that were basically managing agents, known as managing general agents. Many of them are Lloyd's cover holders and such. They know how to price their product and how to pay claims, but they are not licensed and authorized to sell all these products. Sometimes, companies like State National needed an insurance company to do their collateral protection insurance. A couple of these companies would come to us and ask if they could borrow our paper, which is basically the slang for your license and authority. We agreed, allowing them to do that for 5% of all the written premium, and we would take no risk. Over the years, it evolved when other insurance carriers that were downgraded by AM Best from, let's say, an A to a B+ because they had contracts that required them to be an A-rated carrier. For instance, we had a company in Michigan with $200 million in premium. They got downgraded and immediately came to us over the weekend to become their new fronting carrier.

The contract with whom? With the commercial customer, you mean?

Yes, with a commercial customer. A big customer would say, "I will insure all our assets around the world, but they all have to be with an A-rated carrier." Suddenly, their vendor of choice is not A-rated, which would immediately void that contract. The vendor then said, "Well, I can get State National. State National doesn't compete with me on anything, and I can get them on board with 5% of everything I write until I get my capital and surplus back to where it should be." Then they'll dump State National and get back to being A-rated.

And so, how difficult is it to obtain a license to write workers' compensation in Texas, for example? How long does that take? What capital do you need? How difficult is it?

It really isn't about the capital. They don't trust a new startup company or an insurance company that hasn't done business in the state. It's primarily the bureaucracy of the paperwork. They'll say they'll give it to you, but you're on probation for a year to see if you write the business, behave yourself, and pay your premium tax, among other things. So, years can go by. State National invested about 15 years in this process, whereas another startup might think, 'I want to go nationwide.' Let's say you're an insuretech, a guy with a website who wants to insure items temporarily, like ski equipment while you're on the slopes. Some might think, 'I can become an insurance company in a month by getting a fronting arrangement with an insurance carrier and probably a managing general agent (MGA) who can price it, pay claims, service accounts, and so on.'

If we consider a typical fronting, let's say I've got my company and I want to take out insurance. What's the typical line of insurance that was most common and the average value per year of the policy?

It was typically equipment, like inland marine, which involves construction equipment scattered around the country. There might be an MGA in the state of Montana who has the ability to write for the Montana Truckers Association. However, he's not a licensed carrier for workers' comp liabilities, inland marine coverage. He knows how to pay claims. He's got the contract. So, he comes to State National and says, 'This is $10 million worth of premium, I think, annually.' State National then agrees, stating, 'We will let you use our paper. We're licensed for all those products in Montana; workers' comp, inland marine, private passenger auto.'

But there are a few conditions. First, we're not going to take any risk, so you have to find your own reinsurer. Second, we're going to monitor you. We're going to watch your reporting to ensure you don't get us in trouble with the state of Montana. We only have so much capacity in this insurance. Let's say we only have enough capacity, like $100 million in the insurance carrier, because we only have $20 million as capital and surplus, which is required by law.

That has to sit where, though? Does that have to sit in Montana, or is it across the US?

No, it could be anywhere across the US. However, if Montana only writes $1 million and we've set aside $9 million in capacity that's not being used, State National would probably want to drop that person. Conversely, if they started to write $40 million, we would have to intervene because we don't have the capacity for that. We can't inject enough capital and surplus to allow it. So, we monitor everything closely.

Despite this, State National continued to grow, basically despite itself. When I was their marketing director, we didn't actively try to sell; we essentially tried not to sell our product.

why it was so popular?

There were a few reasons. Before State National got involved, there was fronting, typically by a small managing general agent (MGA) with 50 employees and a modest book of business who needed an insurance carrier behind them. They would then partner with an insurance carrier who hadn't been involved in fronting but saw a profit opportunity. This partnership often led to a financial arrangement. However, there was a significant disparity; one was a small businessman, and the other a large insurance company. The large company would start dictating how to price the product and handle claims. If it was profitable, they might consider entering the market themselves and taking over the MGA's book of business.

Alternatively, management changes within the large insurance carrier might lead them to exit the fronting business due to a loss of control in various markets. Fronting became a contentious issue for many state insurance carriers and commissioners who disliked it. They questioned why a Texas company should operate in Montana when they weren't well-known or trusted there, despite being authorized to write books of business in commercial auto and marine.

Does the MGA also set the pricing for these lines?

Yes, the MGA controls everything.

Regarding the fees, if we take a $100 premium, what percentage does the MGA receive, and what does the fronter get?

With a $100 premium, the fronting party would receive 5% right off the bat. Then, the MGA would negotiate a deal with the reinsurance company, which actually takes on most of the risk.

So, they have to find their own reinsurer. You didn't arrange reinsurers for them, did you?

No, we didn't. We didn't even recommend one. That's what I was saying. We essentially tried not to sell. When people would say, "I need authority and paper in Montana and other states," we would respond, "This is our deal, 5% and no risk." And 80% of the people that contacted us walked away, saying that's ridiculous. The reinsurers also said, "This is ridiculous. State National has no skin in the game. Are you kidding me? We don't want a part of this deal." Yet, we just kept growing and growing, continually taking no risk.

Why is that? Why did you keep growing even though people thought it was expensive?

They needed us. Another insurance carrier, as I mentioned, was downgraded from an A-rated carrier to a B+ or something similar.

Or the MGAs just became more popular because of their speed to market. They're local, they understand the market, they understand the business. Unlike other fronting companies, our business model of not taking any risk was horrible for some. Like I said, 80% walked away, but the 20% realized they were small business guys, entrepreneurs. They're all probably in their sixties and seventies now as all this started to boom. But they get to control the product, the brand recognition, the data, and they handle their own cash flow and reporting. They knew that State National would never compete against them.

You mean the MGA? These were guys in local towns?

Right.

So they were going to get the business. They knew the companies, they were doing the sales and marketing for you, and they didn't want to work with these big insurers because they could go and compete with them.

Yes, right. So the MGA's customer, like you and I, would not even know State National existed, except that there was a physical paper copy of a policy saying, "Insured by State National Insurance Company" at the bottom, but otherwise, it was completely branded locally. So if a reinsurer behind it said, "I want to get out of this program in Montana because I have too much exposure in those lines of business" or something like that, the managing general agent in Montana could find another reinsurer seamlessly behind the scenes. No one would be wiser about his business. He'd still have his brand, he'd still be known in Montana.

How did the pricing that the MGA offered to the end customer compare to what the insurer would offer the carrier?

It'd probably be about the same. The MGAs were leaner with less overhead. They knew the market. An MGA writing $10 million in Montana for the Montana truckers would be a great, big, profitable piece of business that could keep his business running. He had 50, 60 employees, focusing on pricing and service, whereas a big insurance carrier, that's not much interest to them.

What was the average policy that you would get from an MGA? What type of business, type of lines?

Our average program would be about five million, 10 million, 15 million annually in premium.

From one MGA?

Yes, from one MGA. We had 80 programs running, with five running off and five coming on board. We knew they didn't last forever.

What do you mean by coming on board and running off? Why don't they just continue renewing?

Well, maybe an MGA's program had changed because two MGAs merged, or one had a different relationship, or couldn't find any reinsurers. Or we wanted to terminate them because, like I said, they promised to write $10 million in premium but were only writing $1llion. There would always be situations like that.

How does the commercial relationship with the MGA and the reinsurer work? Let's say my company goes to an MGA, they go to you to borrow your paper, they find a reinsurer. How does that fee structure and commercial relationship work with the reinsurer?

They work out a share of how they would divide 95 cents of every dollar of premium. The MGA might say, "I have 30 cents of every dollar for administrative costs, and I might be able to withstand the first million dollars in claims. Anything after that, I have to pass off to you, Mr. Reinsurer."

So, the MGA would take some risk as well?

Yes, sometimes they would if they were a large enough operation. They didn't like to, but occasionally they would.

This is a pretty good deal for the reinsurer because they get access to small books of business that they might not be able to access directly.

Yes, and they always said that the reinsurer wanted to get closer to the risk, to the actual customer. They didn't want to be involved in being a local US carrier, and they certainly didn't want to be an MGA.

So, if I'm the MGA, I go to the reinsurer and say, "Look, I've got this book of business for 100 million, for example, and we paid five million to State National. And it cost me 20 cents to run every dollar of claims. "How do you then work out the fee that the MGA keeps?

They were always negotiating the last 20 or 30 cents per dollar, discussing how to divide the profits because there were many variables involved. There were loss ratio caps. If the loss ratio, meaning the amount of claims paid per dollar of revenue, was below 50%, bonuses would be involved. If suddenly 70 cents of every dollar went to paying claims, and State National took 5%, then everyone involved in the deal would be squeezed, and the reinsurer might leave or the contract might need restructuring.

How has the attractiveness changed?

For many years, we essentially sold our services despite ourselves, adopting a 'take it or leave it' approach, which most people rejected. Over the first 15 years, those who really needed fronting and understood the value of a State National deal came to appreciate it. They realized that State National was reliable, not exiting the fronting business, and not competing with them or dictating how to run their businesses. Eventually, we gained a reputation as the gold standard in pure fronting.

Initially, AM Best did not favor our business model, but after years of engagement, they came around. Around 2015, I updated the company website to finally use the word 'fronting'. Before that, we used every term but 'fronting', like policy issuing carriers and other complex terms. We earned respect in various states, being authorized in almost all 50 states with 20 to 30 different authorizations per state, allowing us to offer fronting services to anyone who needs them. We declared ourselves the gold standard of fronting, which made others consider finding dormant insurance carriers to revive, but they lacked the time to achieve the broad licensing that State National had.

This leads to your questions about the Ledbetters and the company going public and selling. Once it became public, everyone saw how profitable it was, and since then, the interest has skyrocketed. However, stepping back, collateral protection insurance remains very stagnant. There are only about 1,500 auto lenders in the country interested in this type of insurance. The big banks generally dislike it; for instance, Wells Fargo faced significant issues a few years back, and another major bank had troubles in the 1990s.

Why didn't they like it?

There's just too much exposure and it negatively impacts their brand reputation. It's not a pristine product. People complain, even though it's specified in their loan contract. If they don't have insurance, they might get force-placed insurance. Many of the big banks aren't really in the car lending business. The finance companies that lend to individuals with high risks and high interest rates dislike it because they repossess cars quickly and don't have time to send notices or collect insurance information from them. So, it's almost exclusively credit unions. There are probably 1,000 credit unions in the country that have a CPI program. There are three big providers, but it's probably $200 million in earned premium per year. It's not growing, except for the fact that the CPI policy, which is force- placed, is priced as a percentage of the loan balance. Since cars are becoming more expensive, cars that were $20,000 a few years ago are now $30,000. That's the only reason the total earned premium is growing.

How about fronting? And how has that changed over the last 10 years in gross written premiums.

That has just skyrocketed. So, when State National was involved, the fronting just kept growing and getting bigger. Around 2014, Lonnie Ledbetter was about 70 years old, and Terry Ledbetter was about 60 years old. Terry only did fronting and Lonnie only handled the CPI because that's what he knew. Even though fronting was becoming much more profitable with fewer employees and was a much cleaner business. If someone could get over the hurdle of our inch-thick contract and wanted to do business with us, it was easy money, that 5%. Lonnie wanted to retire around age 70 and get his money out of the company. They hired an investment firm, whose name I can't recall at the moment, and they filed an SEC, Securities Exchange Commission, S-1 report to get started on going public.

I've been reading the S-1 today.

So what happened then was they found four investment companies. I think BlackRock was one of them. Don't hold me to these numbers because I wasn't privy to all these meetings, but the company was valued at about $200 million. They got these four companies to each take $50 million of stock in a private placement with the stipulation that they would go public as soon as possible. They didn't know Lonnie or Terry Ledbetter personally; all they knew were the numbers, which looked very profitable. So, Lonnie took out his $100 million and moved to his horse ranch outside of Dallas and was happy. Then they became a public company, listed, I believe, on the Nasdaq.

So what's the biggest risk to fronting, the growth in gross written premiums for fronting?

Well, now it's the competition. There was price pressure. So, what happened? When Markel bought State National for over 900 million, which was about three times the book value of the company, everyone was shocked. Suddenly, everyone saw how profitable State National was. Since then, there have probably been 20 fronting carriers created, either as spin-offs from another company or by someone finding a dormant company and trying to get it licensed as quickly as possible. Consequently, there's price pressure on the 5% fronting fee, and these companies often combine taking some risk with the MGA, with a chance of making a profit.

Is it now required to take on risk?

No, it's not required. But competitive pressure is on. If you Google hybrid fronting companies, you'll see they are taking risks.

Is it the reinsurer or the MGA that prefer this?

It depends on how the numbers work out. I think the MGA likes it. Some reinsurers, depending on how the deal is structured, might like it. Philosophically, some reinsurers think that the fronting carrier should have some skin in the game.

How much capital is needed? For example, if you're fronting $100 million, what amount of surplus is required on the balance sheet?

The carrier needs about 20 million in capital and surplus, which should be invested in very conservative bonds. Other than that, reinsurers just look at the history and projections of the book of business. The State National contract protects State National from any catastrophic losses.

What's stopping hundreds of companies from doing this? Is it the time required to get the license or the capital?

It's not the capital; there's plenty of capital available. The challenge is getting the right partners aligned and finding an MGA that can be trusted, along with reinsurers interested in that type of risk.

How has that 5% fee changed? What is the average now?

I think it's more like 3% now, depending on the deal. It's tiered down. For instance, if they're going to write five million annually in premium, it would be 5%. But if it's 100 million in premium, it would stair-step down; 5% for the first 20 million, 4% for the next 40 million. Everyone's being creative with it.

So why did Markel want to buy? What do you think they saw in the business?

First of all, they do not like collateral protection insurance and would prefer to eliminate it if possible. It involves numerous document processors and call center personnel. They simply do not favor it, as it is not considered a pristine product. Their main interest was in State National. They saw State National, which had six licensed, fully capitalized insurance companies. This meant that you could write two programs in the state of Montana, both for commercial auto. One would be under State National Insurance Company and the other under National Specialty Insurance Company. State National would earn a commission from both, but the two managing general agents would be competing with each other, essentially using the same paper. Locally, however, they appeared separate and different, which allowed them to be profitable depending on how well they managed their business.

Then, Markel realized that this was a rapidly growing business segment they lacked. Simultaneously, in the global reinsurance market, there was a surge in capital needing deployment worldwide over the last 10 years. People were looking at asset classes uncorrelated with financial markets, such as catastrophes like hurricanes and earthquakes. Suddenly, a market for catastrophic bonds emerged, and a significant amount of capital could act like reinsurance. A major company we were closely associated with, Nephila, founded by former employees of Willis in Nashville, began gathering capital globally to act as reinsurers. They invested hundreds of millions of dollars. Sometimes there would be claims, and in a year, there could be three hurricanes causing them to lose money. However, in the next five years, there might be no hurricanes.

Markel bought Nephila?

Yes, Markel realized that was another missing piece of what they owned. So, they purchased everything and allowed State National to continue its operations as before, with the same sales team and contracts. However, the immediate street talk was that Markel might be cherry-picking reinsurance projects and overseeing State National's operations. There was concern that Markel might not want to be transparent about their dealings with State National. There was also speculation that Markel was instructing State National to take on some risks in certain deals, with each being evaluated individually for profit potential.

The MGAs were worried that Markel was now going to poach some of their business, effectively encroaching.

Right. Yes, where State National wouldn't go into Montana and compete, Markel might do the same with one of their companies.

Let's say the owners of State National were looking to sell. Firstly, they were looking to cash out. They got a private placement, listed the business, and then Markel made a bid for State National. What did they say they were going to do with the business? What was the strategic rationale for owning it? Obviously, they liked the fronting business, but what else? Did they see some reinsurance strategic value? Would they drive more business? Would they want to reinsure some of the business that State National was fronting? What was the idea?

Even though they said they were going to put up a firewall between State National's business, they'd certainly look for opportunities to reinsure things. They also thought that State National was so profitable that, even with six insurance companies that were well-capitalized, with Markel, we could have 10 insurance companies that could all do fronting and just make money left and right. But some of this stuff starts to blur together, which is part of the problem. They just saw the potential. They saw the profitability in the line increase.

Like you said, when we started, we were doing $100 million and $50 million in fronting. By the time I left, we were doing $3 billion in gross written premium. That's basically $3 billion going through State National, and then they'd scrape off the 5% commission or ceding fee, and the rest of the money would go out to the reinsurers. All the money came through State National, and they just saw that it was just expanding.

More things were happening in the market, more reinsurers wanted to get closer to the market, and they liked how nimble MGAs were. The whole insurtech, fintech movement was coming. Any guy with a website who had a good idea could become an insurance company very quickly, with a managing general agent and a fronting carrier up and running with virtually no downside risk if it didn't work. It's just a lot of things; hardening market prices, going up on insurance. Everything was in alignment that Markel thought, well, I'm going to pay two or three times book value for this company because I like where it's going. And there's nobody close to being State National in pure fronting, which just seems to be growing exponentially.

Last year, Markel handled program services with fronting in $3.7 billion in gross premium written. Yes, gross written premium, $3.7 billion last year. And I believe I have the notes here as well. I think $1 billion of that is attributable to Nephila.

That could be accurate. When I was there, Nephila primarily functioned as a reinsurer for some of the programs at State National, and we were quite familiar with them. However, as Markel began integrating the components, they decided to establish their own reinsurance company, Markel Re, and use Nephila as alternative capital to act like reinsurance. They also had State National, which was virtually everywhere; almost every state and product line.

I believe they realized it would be challenging, even though all the financials became public when Markel acquired us. State National was eager to sell too, especially after Lonnie Ledbetter left. When we were publicly traded on Nasdaq, Terry Ledbetter owned 38%, and his family probably owned around 45% of the stock. He wanted to retire, and owning 45% of a publicly traded company makes it difficult to sell in blocks.

When Markel made the offer, and considering there weren't many other interested buyers, especially with Markel's attractive price, that's when the deal was made. I think Markel is pleased with it, but I know they are somewhat changing the State National model.

How are they changing it?

They've even stated publicly that they will evaluate every deal individually. The ceding fee can change, and some entity of Markel might take some risk on it if that would benefit the deal. They are becoming somewhat like the 20 other new fronting carriers that have formed in the last five to eight years.

They are not adhering to the original model, which involved not taking any risk and not competing with their MGAs, correct?

Yes. They might still contractually state that they will not compete with you, Mr MGA. You can do business with State National, use their paper for 5%, and Markel will not impose on you. We won't dictate how you run your business. Like I mentioned earlier, how fronting used to be 20 years ago, when insurance carriers would dabble in it and then exit. Some of them took significant risks with the MGA and lost a lot of money, leading their boards of directors to question why they were engaging in fronting when it wasn't their core business. But when State National made it its core business, there were always opportunities to make more money by potentially taking some risk, though they generally did not do so.

But now at Markel, you have both the carrier and the fronting business, which, as you mentioned, kind of competes with itself in a way. What's the advantage of Markel owning State National? I understand that it generates business for Nephila, but aside from that, what other advantages does it have being part of Markel?

Yes, well, Markel has the non-insurance business, and then they have the large insurance business. I thought they felt that they weren't close enough to the policyholders, the people paying the premium, due to the rise of the managing general agents. MGAs are nimble, and they're the closest to the policyholders. They felt they were too distant from all that, being a big bureaucracy sitting in Raleigh. They thought this would make them more connected. It's just the way the market is going. Insurance carriers are slow, bogged down, and very traditional.

They thought, with State National, there's no risk at all. The revenue just keeps coming in the door faster than they can count it. The growth and appeal of the MGA, the quickness to go to market, the MGA that owns the business and wants to keep it, not being intimidated by a big insurance carrier, were all appealing. I think, with the rise of insurtech and fintech, alternative capital becoming easier to function as reinsurance capital, and faster, quicker processes. It just gave them diversity. It rounded out their complete insurance portfolio so they could offer anything to anyone around the world. Whether it was an MGA in Montana or helping another reinsurer out of Switzerland getting involved in a big deal, they felt it got them everything they ever wanted in one fell swoop. Plus Nephila.

What do you think is the biggest risk to Markel owning and operating State National?

Like I said, the collateral protection insurance, I think they'd love to sell it if they had time to look around and find a buyer for it. The other two companies that do it in the United States both have CEOs in their seventies who would probably like to get out too. So, I don't think there's anything there. I think their biggest risk would be that everything's leveled off. There's too much competition now. Every deal is a street fight where you have to sharpen your pencil and lower your costs. As a fronting carrier, you have to offer something, maybe a lower ceding fee, maybe you'll offer third-party administrative services to someone who can't handle claims well.

So, it'll really come down to fine-tuning every aspect, and everything will boil down to minute margins, not like the margins they had before. It'll be a real street fight. Slowly but surely, the Markel and State National mystique, and the State National business model will slowly, in my opinion, melt away and become just like everybody else.

Maybe, in five years, it'll be just like it was 30 years ago when Markel was just another big company that dabbles in fronting, and I'm a managing general agent in Montana, and I don't want to do business with them. They're going to tell me how to run my business. So, it'll probably revert to how it was 30 years ago. But like I said, there's enough business and there's enough of a barrier to become an insurance carrier that's widely licensed with products in 50 states with, like I said, 30 lines of insurance. That's pretty hard to do. It takes a long time to do so. That's the biggest barrier. But like I said, in the last five years, 20 carriers have emerged or been reborn, and they're slowly but surely finding their niches.