Markel’s ILS revenues rise sharply on asset growth and Nephila acquisition

Markel Corporation saw operating revenues earned from its ILS investment management operations rise sharply in 2018, coming in at $92 million for the year compared to $29 million in the prior year.

Driving the increased revenue from operations managing third-party capital invested in reinsurance linked assets was the growth of assets under management and the addition of Nephila Capital, which Markel acquired in November.

It was Markel’s retrocession focused ILS fund management operations Markel CATCo Investment Management which likely drove asset growth related revenue increases year-on-year, given this unit had been under the Corporation’s ownership for longer than Nephila.

Of course the issues related to the catastrophe losses suffered by Markel CATCo’s retro reinsurance investment fund strategies have caused Markel to write-down its investment in the manager, but the operational revenues will have helped to offset this to a degree.

With Nephila Capital joining the Markel Corporation stable as of November 2018, the re/insurer will have benefited from some revenues during that period no doubt, especially given Nephila’s $11.5 billion of ILS and reinsurance linked assets under its management.

Markel also revealed that it earned $96 million in operating revenue in 2018 from the State National program services business, a considerable increase to the only $15 million that it earned from the unit in 2017.

Markel acquired State National in the fourth-quarter of 2017, so the 2018 operating revenues provide the first glimpse of what this program services business brings to Markel over a full year.

Markel had previously said that the combination of ILS investment management operations through CATCo and Nephila, along with the State National operations, could be a game-changer for the firm.

Its executives reiterated this hope during the firms fourth-quarter results presentation yesterday.

Co-CEO of Markel Corporation Richard Whitt said, “With the completion of the Nephila acquisition in November 2018 we have significantly increased our ILS investment management operation. With Nephila and Markel CATCo we have approximately $14.5 billion of net assets under management at the end of 2018 compared to about $3 billion of net assets under management at the end of ’17.

“Starting with our acquisition of CATCo in 2015, State National in 2017 and most recently the Nephila acquisition in 2018, we’ve been working very hard to build our capabilities in the insurance-linked securities and program services arena. We see significant synergies possible between our insurance, reinsurance, ILS and program services businesses.”

On the Nephila acquisition, it’s clear that Markel is taking a long-term view and sees the embedding of ILS investment management within its business model as key to its future.

Whitt said, “We’re thinking more about the next 5 and 10 years, that’s how we think about the goodwill that we paid for Nephila when we bought it. We’re thinking about the next 10 and 20 years and what that looks like. We think it’s a very bright future for ILS.”

If Markel’s ILS investment management business can continue to deliver operational revenues of this level the company can expect to pay back its investment in Nephila Capital relatively quickly, particularly once a full year of revenues flows through in a year with lower catastrophe activity and therefore higher performance fee income as well.