Nephila AuM drops $1bn to $8.8bn in second-half of 2021

Assets under management at Markel’s flagship insurance-linked securities (ILS) operation Nephila Capital dropped by roughly $1 billion during the second-half of 2021, as the effects of natural catastrophe activity and redemptions dented the ILS fund managers scale.

However, operating revenues from Markel’s insurance-linked securities (ILS) business Nephila Capital increased during the last year, driven by expansion of activities in the managing general agent (MGA) operations.

But investment management fee income declined, largely due to one-offs in 2020 as releases from side pocket reserves boosted Nephila’s fee income, while the decline in assets under management also dented fee income, Markel said in reporting its results yesterday.

Nephila Capital’s assets under management had been fluctuating over the course of 2021, on the back of the significant catastrophe loss activity that the insurance-linked securities (ILS) and reinsurance sector was impacted by.

As we now know, 2021 natural catastrophe insured losses were around the fourth-highest annual total on record, so it is natural for the largest investment manager of natural catastrophe, weather and climate linked insurance assets to be particularly affected.

Nephila Capital’s assets under management, across its portfolios of catastrophe bonds, insurance-linked securities (ILS), other collateralized reinsurance and insurance contracts, as well as weather risk instruments, ended 2020 at $9.6 billion, but then fell slightly to $9.5 billion by the end of March 2021, likely on the effects of US winter storm losses.

The second-quarter of 2021 then saw Nephila Capital record a strong recovery in AuM, to reach $9.8 billion by the end of June 2021 thanks to some fund-raising successes.

The third-quarter of 2021 saw the largest natural catastrophe event to strike Europe in many years, the severe flooding, as well as hurricane Ida which turned out to be the largest insured catastrophe loss of the year.

By the end of Q3 2021, Nephila Capital’s AuM had declined to $9.3 billion, as we reported at the time.

Now, Markel has disclosed a further decline in Nephila’s AuM to $8.8 billion, which is the lowest level for some years and represents a $1 billion decline through the second-half of last year.

It’s not just the catastrophe loss activity in 2021 that has driven the decline, of course.

Rather it is the consecutive years of challenging catastrophe losses that have driven a shake-up in investor motivation and allocations in some cases, resulting in redemptions, which alongside loss of and trapping of capital, has severely dented some ILS managers and strategies.

Many of the ILS investment managers listed in our  Insurance-Linked Securities Investment Managers & Funds Directory  have reported a decline in assets after 2021, with only a handful gaining and those largely being smaller managers, more catastrophe bond focused managers, or newer market entrants.

For Markel as a business, the insurance-linked securities (ILS) operations continued to drive strong revenues, with the company reporting over $202 million of income from services and other revenues in 2021, up slightly on the prior year.

However, expenses of the ILS business at Markel also rose, but this side has suffered because of the the running-off of Markel CATCo and now also the other retrocessional reinsurance investment management unit Lodgepine, which was put into run-off last year.

The expense side of the ILS business reached $186.5 million for 2021, up from $168 million in the prior year.

For 2022, there have been changes in the Nephila Capital ILS business, not least the sale a majority stake in its managing general agent (MGA) Velocity Risk, but also the launch of Nephila’s new specialty lines focused Syndicate 2358 at Lloyd’s.

At the same time, Markel’s platform offering of Nephila Capital alongside fronting specialist State National remains compelling and an area of potential growth, while Nephila also remains the underwriter of catastrophe reinsurance for the group.

2022 looks set to be a pivotal year for Markel’s ILS business.

This is in terms of rebuilding investor confidence, as the entire ILS market will be attempting this year, while capitalising on the synergies offered by Nephila’s still expanding platform and ability to source increasingly diverse risk, but also in terms of seeking closure for CATCo and Lodgepine, to stem expenses from those two businesses.