Markel’s fee income from CATCo well ahead of expectations: Whitt

Markel Corporation continued to report a significant increase in the investment management income it has earned from its reinsurance and retrocession linked specialist ILS investment manager Markel CATCo in its third-quarter earnings.

Markel’s investment income from Markel CATCo has risen an impressive 166% over the first nine months of 2018, compared to the prior year, reaching $53 million for the year-to-date.

That’s signficant when you consider that when Markel acquired reinsurance investments and fund manager CATCo in December 2015 it cited an acquisition cost of $205.7 million.

Hence the income earned has repaid over a quarter of the investment in just nine months, quite a result for Markel.

In fact, Co-CEO of Markel Richard R. Whitt III said that the management fees are ahead of the firms expectations, thanks to Markel CATCo’s growth.

“In terms of Markel CATCo’s progression, management fees are well ahead of where our expectations would have been at the time of the acquisition, obviously as a result of the significant growth in AuM that we’ve had over the three years,” Whitt explained.

Of course 2017 saw the investment income dip for a while following the major hurricanes and other catastrophes that negatively affected Markel CATCo’s reinsurance and retrocession investment funds, but in 2018 the investment income has returned in spades.

Markel said that it has earned investment management fees of $18.3 million in just the third-quarter of 2018, compared to only $1.2 million for Q3 2017 due to last year’s catastrophe events.

For the first nine months of 2018 the investment fee income reached $53 million, up over 166% on the $19.9 million earned for the first nine months of 2017.

As the level of assets under management has increased at Markel CATCo so too has the investment management income that its owner Markel benefits from.

The acquisition is paying itself off extremely rapidly, demonstrating the value that an ILS management and third-party reinsurance capital investment manager can bring to a traditional re/insurance group.

It’s no surprise that re/insurers are looking to integrate ILS businesses within their own, as earning fees for underwriting risks that you manage but do not assume on your balance-sheet is a very attractive addition to the traditional business model.

Given the amount of income earned from its ownership of Markel CATCo, it will be fascinating to see how Nephila Capital adds to this, once the acquisition of that ILS manager is completed and Markel Corp. begins to report on the income earned from both of its independent ILS entities.

The contribution that ILS fund management businesses make to Markel’s bottom line will be significant, showing that the rationale behind these acquisitions was sound and that they provide a valuable platform for driving earnings as well as growth for the firm.

Of course Markel also acquired fronting specialist State National, which means that in future the Corporation will benefit from fee income earned by its work alongside third-party capital providers, expanding the benefits that Markel will reap from ongoing ILS and alternative capital market growth.

Once Markel puts this all together and finds the natural synergies that will emerge between these three acquisitions it will likely significantly boost its fee income.