Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Nephila AuM returns to growth as ILS profits rise for Markel in Q4


The operations of the largest dedicated insurance-linked securities (ILS) fund manager, Nephila Capital, delivered higher revenues to parent Markel Corporation in 2020, thanks to expansion and growth of its managing general agent (MGA) platform and a return to growth in assets under management (AuM), which hit $9.6 billion.

markel-nephila-capital-logosIn reporting its fourth-quarter and full-year 2020 results, Markel Corporation noted higher revenues flowing through thanks to  this important and expanding MGA side of Nephila’s business activities.

ILS revenues from the Nephila business had slid slightly through 2020, as the managers assets under management had fallen to $9.4 billion by the end of September, down from $10.4 billion at the end of 2019.

But now, Nephila Capital’s assets managed for third-party investors have returned to growth again, with the ILS fund manager adding $200 million during the fourth-quarter of 2020, to end the year at $9.6 billion.

Overall, Markel reported a decline in insurance-linked securities (ILS) revenues for the fourth-quarter and full-year 2020.

Driving this decline was the running off of retrocessional reinsurance ILS manager Markel CATCo, who’s assets under management have slid further to just $1 billion left at the end of 2020 (down from $2.8bn at the end of 2019) as the portfolios of risk it managed are being run-off.

On top of this, a further reduction in the management fees earned on the remaining capital has also reduced revenues under the Markel CATCo business.

But offsetting this has been an increase in revenues earned under the Nephila Capital platform, with the expansion and growth of the Velocity Risk managing general agency (MGA) a key driver, Markel explained, slightly offset by lower management fees for 2020 given the decline in AuM at Nephila.

For Q4 2020, Markel reported ILS related revenues of just over $66 million, very slightly down on the $67 million reported a year earlier.

For full-year 2020 ILS related revenues reported were $212.3 million, down from the $225.6 million reported for 2019.

However, given assets under management are roughly $2.6 billion down at the end of 2020, having been down more earlier in the year and with lower fees at CATCo, it seems clear that Nephila’s underlying ILS revenue delivery to Markel has risen.

Expenses continue to be higher though, year-on-year, across the insurance-linked securities (ILS) business at Markel, which the company puts down to spending on the expansion of Nephila’s MGA business.

For Q4 2020 though, the expenses are actually down year-on-year, suggesting this may be a more useful run-rate marker quarter, as Markel reported $47.7 million of ILS segment expenses, down from $58.4 million in Q4 2019.

Which means the profit on Q4 2020 ILS operations was actually higher than in Q4 2019, thanks to the much lower expenses.

For full-year 2020 ILS expenses were $231 million, up from $217 million in the prior year.

As Nephila Capital’s assets under management continue to recover and costs settle, while initiatives like the MGA activities begin to deliver more revenues and likely higher-margin business as well and once CATCo is run-off fully, we should see the ILS revenues outpacing expenses for Markel.

It’s also worth considering how strategic moves like Markel’s shift in writing all property catastrophe reinsurance over to Nephila will affect revenues as well going forwards, as this could have a positive effect on the ILS segment.

As Nephila’s updated AuM figure is $9.6 billion as of Dec 31st 2020, it’s possible the ILS manager may have achieved some further growth at January 1st in time for the important reinsurance renewals.

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