ILS operating revenues fall at Markel as Nephila AuM slides to $9.5bn

Assets under management (AuM) at the largest dedicated insurance-linked securities (ILS) specialist manager Nephila Capital fell slightly to $9.5 billion at the end of the first-quarter, with the reduced assets also a driver of lower ILS operating revenues at Markel Corporation.

Nephila Capital’s assets under management across catastrophe bonds, insurance-linked securities (ILS) and other collateralized reinsurance and insurance contracts fell by $100 million during the quarter, from $9.6 billion at the end of December 2020, to $9.5 billion at the end of March 2021.

Nephila’s assets had returned to growth in the final-quarter of 2020, as the manager had added $200 million during the fourth-quarter of 2020.

But now, AuM at Nephila is $500 million down on the prior year period, as Nephila had counted $10 billion of assets at the end of March 2020 and an even higher $10.4 billion at the end of 2019.

The decline in assets has, of course, been driven by the impacts of the COVID-19 pandemic, as well as natural catastrophe losses.

In the last quarter, it’s possible some of the decline in assets is also related to impacts from the US winter storms and Texas freeze, which may have driven some losses to certain ILS positions in the Nephila portfolios.

As Markel’s flagship ILS management operation, Nephila drives a significant amount of revenue each quarter, but in Q1 2021 operating revenues dipped to just slightly under $40 million, down from $50.8 million in the prior year quarter.

Markel explained the dip in ILS operating revenue as partly due to Nephila’s decline in assets, but it’s likely also partly due to lower fee income earned due to catastrophe activity, including from the aforementioned US winter storms and Texas freeze.

Expenses for the ILS operations at Markel remained steady for the period.

Markel also reported that Nephila’s revenues attributed to unconsolidated entities under its management fell to $28.6 million for Q1 2021, down from $41.5 million in the prior year period.

Positively though, Nephila’s position in Markel’s underwriting infrastructure continues to rise in importance, which we can tell by seeing increases in the reinsurance recoverables due from Nephila’s reinsurance entities to the parent, as well as a significant increase in premiums underwritten through program services operations by Nephila.

Reinsurance recoverables attributed to Nephila’s reinsurers hit $365.2 million at the end of Q1, up from $353.8 million at the end of December, while program premiums written by Nephila hit $117.3 million, up from $90.5 million.

So Nephila continues to cement its role within Markel’s underwriting and capital infrastructure, but the impacts of the pandemic, prior years losses, trapped capital and now also the significant Q1 2021 event of the winter storms and freezing weather have all taken their toll.

The ILS manager continues to be the largest in the sector though and retains its role as one of the largest catastrophe reinsurance providers in the world.

Going forwards, strategic moves like Markel’s shift in writing all property catastrophe reinsurance over to Nephila will affect revenues as well going forwards and could also turn out to be a driver for AuM at Nephila as well.