Nephila Capital revenues drive ILS income higher at Markel in Q1

Revenues earned through the operations of Nephila Capital added significantly to Markel Corporations income from its insurance-linked securities (ILS) operations during the first-quarter of the year.

Nephila Capital related ILS and collateralized reinsurance activities drove an impressive $43.2 million of revenues for Markel in the quarter, which almost helped to offset additional costs the company had to bear as a result of the effort to support its other ILS entity Markel CATCo Investment Management.

Income earned from its relatively recently acquired ILS investment management operations provides a significant boost to the bottom-line for Markel.

At the end of 2018, Nephila delivered an impressive $25.3 million of fees and revenues in less than two months, which was telling of just how high that figure could become.

Now, with the first full quarter out-of-the-way, we can see the level of income Nephila Capital’s ILS management and reinsurance underwriting operations will provide to Markel, as the $43.2 million of management fees for services to the Nephila ILS funds and reinsurers is a significant sum.

It’s particularly impressive given the Nephila ILS funds and reinsurance investment strategies will still be dealing with an element of trapped collateral and creep from the prior year catastrophe losses, we imagine.

Acquiring Nephila Capital cost Markel a total consideration of $975 million, so if the ILS manager can deliver on similar levels of revenue through the year (even higher once the hangover of prior year catastrophes goes away), this price seems very attractive when considered over the longer-term.

The impressive revenues delivered by Nephila to Markel in Q1 2019 helped to offset a decline in investment management fees earned from Markel CATCo.

In the first-quarter, Markel CATCo’s retrocessional reinsurance focused ILS operations delivered $9.6 million of fee income to parent Markel, down from the $17.3 million delivered in the prior year quarter.

Despite the steep decline, which is the result of trapped collateral and loss impacts from prior year catastrophe events, this is still impressive and demonstrates the value that can be delivered by the manager.

Overall, largely thanks to the significant boost from Nephila, Markel Corporation’s insurance-linked securities (ILS) related service and fee revenues came in at $53.4 million for Q1 2019, up significantly from the prior year when it was only CATCo’s contribution of $17.3 million that featured.

However, operating expenses for the ILS related activities were higher than the revenues earned, as costs associated with the internal review of Markel CATCo eroded the profitability of the ILS segment for Markel.

With that internal review now over, having found no evidence of “bad faith in exercising business judgment” by Markel CATCo personnel when it came to setting loss reserves in late 2017 and early 2018, the costs should begin to decline over time, making the ILS business a more profitable contributor to Markel’s overall earnings.

The Nephila Capital contribution, being so positive, was deemed worthy of a specific mention, as Markel Co-CEO’s Thomas S. Gayner and Richard R. Whitt, commented on the Q1 result, “Our results for the quarter reflect strong performance in our investment portfolio, largely driven by favorable movements in the equity markets. We experienced organic growth within both our underwriting and Markel Ventures operations, and our results also reflect contributions from our recent acquisitions of Brahmin, within our Markel Ventures operations, and Nephila, within our insurance-linked securities operations.”

Markel also suffered some further losses on its own investments in the Markel CATCo retro and reinsurance linked investment funds during the quarter, revealing further deterioration in the value of certain positions as the net asset values (NAV’s) declined in the quarter.

This should slow now and Markel will be hoping that the loss creep impact comes to an end, allowing any remaining value in investment positions it holds in CATCo funds to be realised.

Additionally of note, Markel reported recognition of a small amount of fee income for the reinsurance contracts it has written on its own balance-sheet to support Markel CATCo’s renewals this year.

Positively, this commitment from Markel demonstrates its willingness to assist Markel CATCo through the challenging period it faces, helping to provide continuity for ceding clients and deliver the protection products that the market still demands.

If the Markel CATCo business can be recovered and continued, which the company clearly hopes to do, the revenues from ILS operations could become really significant for Markel.

Markel had previously said it would adapt the Markel CATCo underwriting and investment strategy based on learnings from the catastrophe losses suffered in 2017 and 2018 and the investment manager showed a commitment to its clients in delivering on its 2019 portfolio as well.

Once loss creep from 2017/18 is behind the market and if the Markel CATCo strategy can be adapted successfully, the Markel ILS business revenues could build into something really impressive.

That’s not even considering the broader synergies that will not be so apparent, particularly between Nephila, State National and Markel, where the platform now available offers the Corporation significant flexibility and efficiencies for the future.

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