Markel’s ILS revenues fall on lower fee income at Nephila

Evidence of third-quarter 2020 catastrophe loss impacts and trapped capital are seen in Markel Corporation’s third-quarter 2020 results, as the company reported reduced revenues from its insurance-linked securities (ILS) operations, primarily due to a decline in management fee income at Nephila Capital for the period.

Nephila Capital, the largest dedicated insurance-linked securities (ILS) investment manager in the industry, will clearly have seen its portfolios of reinsurance affected by the aggregation of catastrophe losses during the third-quarter of the year.

Markel reported last night that its income and revenues from the ILS fund management business it owns declined compared to the previous quarter and also year-on-year.

A number of factors appear to have driven this decline, with lower revenues and management fees reported at both the Nephila Capital unit and the in run-off Markel CATCo as well.

Markel, the global insurance, reinsurance and investment group, positions insurance-linked securities (ILS) as a significant area of opportunity in its business, having acquired its way into the space, buying first CATCo Investment Management and then Nephila Capital, as well as program fronting specialist State National.

Then more recently, Markel launched Lodgepine Capital Management as a new retrocessional reinsurance focused ILS investment management unit.

Chief among the reasons for the drop in operating revenues for Markel’s insurance-linked securities operations was lower revenues at its Nephila Capital operations, the company explained.

Markel reported that total revenues from its insurance-linked securities operations were $38.5 million and $146.3 million for Q3 2020 and the first-nine months of this year.

The majority of that comes from Nephila and Markel CATCo’s run-off, $32.8 million and $122.7 million, respectively.

Last year, for Q3 2019 and the first-nine months of 2019, the total ILS operating revenues figures were $54.9 million and $158.6 million, respectively.

Driving the reduction and lowering Nephila Capital related ILS revenues for Markel, were reduced investment management fees driven by an increase in capital held in side-pockets, so which doesn’t earn a management fee income, as well as redemptions experienced in 2020.

Nephila Capital’s assets under management fell slightly to $9.4 billion at the end of Q3 2020, down from $9.5 billion at the end of Q2.

Nephila’s ILS assets under management have now fallen by approximately $1 billion, from around $10.4 billion at the end of 2019.

This reflects what Nephila Capital Co-founder Frank Majors told us in a video interview earlier this year, when he explained that the company had seen some redemptions from investors due to the economic climate induced by the coronavirus pandemic.

Majors said that the level of redemptions was not surprising, given large institutional investors need to rebalance portfolios after a major hit across financial markets like was seen due to the pandemic.

It’s clear this situation is stabilising as the asset pile hasn’t slipped much further.

The major catastrophe losses and aggregation of smaller catastrophe loss events will have been another driver through the third-quarter, perhaps trapping some more collateral positions for Nephila, as given the size of its portfolio the manager will have had exposure to all the major loss events experienced.

There could also have been some further side-pocketing of potential COVID-19 business interruption exposed positions at the manager as well.

Lower revenues from the in run-off Markel CATCo were another driver of lower fees in the period, as it continues to successfully return capital to its investors. Markel CATCo’s assets fell to $1.2 billion at the end of September 2020, down from $2.8 billion at the end of 2019.

Across the nine months, Nephila revenues are up, but offset by the reduction in income from Markel CATCo.

At Nephila, the nine-month growth in operating revenues was down to expansion of its managing general agent platform activities, offset slightly by the same factors as above, more side-pocketed capital and redemptions reducing its asset base.

So Markel’s ILS operations continue to be affected by the pandemic it seems, which given the size of Nephila is unsurprising, as it was always bound to feel effects on both the investor and risk side of its business.

It’s also no surprise if third-quarter catastrophe activity affected the revenues from the Nephila business as well, given its broad catastrophe risk exposure.