Nephila Capital’s assets rise to $9.8bn, as cat program premiums expand

Assets under management (AuM) at the largest dedicated insurance-linked securities (ILS) specialist manager Nephila Capital rose to $9.8 billion after the second-quarter of the year, while revenues reported for the period were almost flat with the prior year.

The second-quarter of 2021 appears to have been more stable for Nephila Capital, which had experienced a decline in revenues earned and reported by its parent Markel in the first-quarter of the year.

The return of asset growth will have helped, as Nephila’s ILS AuM had falled to $9.5 billion at the end of the first-quarter, so the ILS and reinsurance linked investment manager added roughly $300 million of capital during Q2, which will have helped on the revenue front.

But also helping and promising to drive far more value longer-term for parent Markel, is the fact premiums assumed by Nephila Capital through programs focused on catastrophe exposed property business are up significantly year-on-year.

For Q2 2021, Nephila Capital recognised total revenues of $42 million, only very slightly down on the $42.2 million earned in the prior year period.

For the first-half of 2021, Nephila’s revenues were $70.7 million, down from the prior year’s $83.7 million, which will be a function of the lower assets under management and also Q1 events such as the US winter storms and polar vortex related impacts.

Markel’s program services and fronting businesses ceded more property catastrophe premiums to Nephila though, which should help the ILS manager earn out over the longer-term.

These premiums are fronted by Markel entities, including its State National unit, then ceded to Nephila’s Lloyd’s Syndicate 2357 or other reinsurance entities in Bermuda.

Gross property catastrophe premiums written through these programs with Nephila reached $186.7 million in Q2 2021, up from $122.9 million in the prior year.

For the first-half of 2021 the catastrophe premiums fronted and ceded to Nephila’s reinsurers reached $304.0 million, up from the $213.4 million ceded for the first-half of 2020.

Given the much improved rate environment, both in primary catastrophe exposed property business and reinsurance these premiums should earn out better than the prior year as well, loss activity allowing.

It’s also worth considering the efficiency of the way Nephila Capital accesses this business, making use of its global reinsurance platform to flow premium as efficiently as possible to its range of ILS funds and investors.

Which means the expenses taken out of the premiums should be lower than a traditional risk-to-capital market chain, elevating the chances of driving higher profits longer-term.

As you’d expect under this arrangement between Markel and its ILS fund manager Nephila, Markel’s reinsurance recoverable reported on its balance-sheet from Nephila’s reinsurers has risen as well, reaching $466.7 million at June 30th 2021, up from $353.8 million at the end of December 2020.

The higher premiums ceded include Markel’s shift to stop writing catastrophe reinsurance on its own balance-sheet and to channel that to Nephila’s funds and strategies, a decision made late in 2020.

Markel’s overall operating revenues for its insurance-linked securities (ILS) business rose during the second-quarter of 2021, helped by the increase in program business undertaken with Nephila.

However, for the six months Markel’s ILS operating revenues were down, largely due to lower AuM at Nephila, partly offset by this increasing program premium business.

For the second-quarter, Markel’s ILS service and other operating revenues reached almost $55.8 million, up from the prior year’s near $50.7 million.

For the first-half they were just over $92.7 million, a little down on the prior year’s $101.5 million.

Operating expenses for the ILS unit were importantly below revenues in Q2, at $46.65 million for Q2 2021.

Markel had previously explained that costs of setting up program related items, launching new funds and Nephila Capital’s MGA were driving expenses higher.

With Nephila Capital’s ILS assets under management having recovered to $9.8 billion and now heading in the right direction, the ILS manager will be aiming for further growth in the currently attractive market environment.

Nephila may have had additional opportunity to expand its assets in time for the July 1st renewals, which will not have been reported in Markel’s first-half results. We’ll update you when any further details become available.