In the last quarter of record, revenues earned from its flagship insurance-linked securities (ILS) operation Nephila Capital rose for parent Markel Corporation, but assets under management at Nephila Capital declined heavily in Q3, dropping by $500 million to $9.3 billion by the end of September.
Nephila Capital’s assets under management have fluctuated over the last year on the back of the significant catastrophe loss activity that the insurance-linked securities (ILS) and reinsurance sector has been impacted by.
Nephila Capital’s assets under management across catastrophe bonds, insurance-linked securities (ILS) and other collateralized reinsurance and insurance contracts ended 2020 at $9.6 billion, but then fell slightly to $9.5 billion by the end of March 2021.
The second-quarter saw Nephila Capital’s AuM rebound strongly, to reach $9.8 billion by the end of June 2021.
But now, Markel reported last night that Nephila’s AuM has now fallen back to their lowest level for some years, at $9.3 billion at the end of the third-quarter of 2021.
We can only assume that the impacts of major catastrophe loss events including hurricane Ida and the European flood, plus possibly some shifting of investor allocations or redemptions, will have driven the decline in assets.
Despite the lower level of assets at this time and the significant catastrophe losses suffered through the third-quarter of 2021, Nephila Capital delivered higher fee income to Markel for the quarter, year-on-year.
Third-quarter fee income revenues earned by Markel from the Nephila Capital ILS operations reached $32.8 million, up from $29.8 million in the prior year.
Once again, Markel attributes the increased ILS revenues it earned in the quarter to growth in its third-party Nephila managing general agent operations, offset by lower assets in Q1.
For the year-to-date though, fee income remains slightly behind the prior year, which is largely a function of reduced assets at Nephila through Q1 and the loss activity seen from winter storms, plus the impacts of events through recent months.
The nine-months 2021 Nephila Capital revenue total was $103.5 million, where as nine-months 2020 reached $113.5 million.
The reduction in assets at Nephila after Q3 likely will translate into slightly lower management fees for a time, until fundraising conditions become easier and new capital is added to its strategies.
Nephila Capital continues to play an increasingly important role in underwriting catastrophe reinsurance risks for Markel as well, with the shift to writing all property cat business at Nephila now having a meaningful impact in premiums flowing to Nephila strategies, as well as in reducing volatility for Markel’s balance-sheet results.
Of course, the program business segment, where Nephila assumes primary sources of largely catastrophe exposed property risk written by Markel’s entities including State National are where significant expansion has occurred.
Markel reported that gross premiums written through these programs with Nephila reached $283.7 million and $587.7 million for the quarter and nine months ended September 30th 2021, respectively, well up from the $119.2 million and $332.6 million for the quarter and nine months ended September 30th 2020.
These premiums are all ceded to Nephila reinsurers and its Lloyd’s Syndicate 2357 and provide an efficient pipeline to source property catastrophe risk premiums for the ILS investment manager.
As a result of the continued growth and activity in pushing catastrophe exposed risks towards Nephila, Markel said that reinsurance recoverables on its consolidated balance sheets included $601.9 million due from Nephila reinsurers as of the end of September 2021, up from $353.8 million at the end of 2020.
Overall, in its insurance-linked securities (ILS) reporting segment, which includes activities of its retro reinsurance investment manager Lodgepine Capital Management and the legacy running-off of Markel CATCo, as well as Nephila, Markel has reported increased revenues for the quarter and nine-months.
Services and other revenues reached almost $46.9 million for Q3, up from $35.5 million in the prior year period.
For the nine-months 2021, ILS revenues reached $139.6 million, up slightly on the prior years $137 million.
Expenses have continued to rise though, but with Nephila’s expanding MGA platform, a startup retro manager in Lodgepine and the continued costs of running off Markel CATCo, that’s no surprise.
ILS expenses reached $45.3 million for Q3 2021, up from $42.7 million in the previous year, while for the nine-months the ILS expenses figure was $140 million (so slightly above revenues), compared to $131.9 million in the prior year.
Going forwards, reduced assets at Nephila will hit these ILS revenues for Markel, while continued costs related to Markel CATCo may also elevate the expenses of its ILS unit for a time.
Lodgepine Capital Management remains a relatively small fund raised at the middle of this year, but there could be an opportunity there for Markel to raise additional capital to respond to the challenges the retro market is seeing as the year-end approaches.