Nephila Capital revenues help offset CATCo costs for Markel

Revenues earned through the operations of its insurance-linked securities (ILS) manager Nephila Capital have helped to offset costs related to Markel CATCo in the second-quarter and first-half of the year for owner Markel Corporation.

Revenue contributions to Markel are now being fully reported for the activities of the Nephila Capital ILS business, but so too this quarter are expenses related to the Markel CATCo internal review and litigation.

Nephila Capital related ILS and collateralized reinsurance underwriting and management activities drove an impressive $38.8 million of revenue for Markel in the second-quarter of 2019.

This takes Nephila Capital revenues earned for the first-half of the year to an even more impressive $82 million for Markel.

Again, this contribution almost helped to offset the additional expenses that Markel has had to bear as a result of the effort to support its other ILS entity Markel CATCo Investment Management.

As we reported last week, Markel CATCo is now to be wound down but a new retrocessional reinsurance investment manager is to be launched by Markel, as it seeks to maintain a foothold in that area of the ILS management industry.

Some income continues to be earned from the Markel CATCo business though, perhaps underlining just why Markel is to persist with a retro reinsurance ILS management operation.

For the second-quarter Markel reported investment management and incentive fees earned from the Markel CATCo Funds of $8.5 million and $18.1 million for the first-half of 2019. That’s roughly half the $17.4 million and $34.7 reported in 2018. A little further CATCo related revenue was earned from ceding fees as well.

The process of getting to the stage of winding down Markel CATCo has not been without its costs though.

Markel reported that its insurance-linked securities (ILS) segment, which includes the operations of both Nephila Capital and Markel CATCo, recorded total operating revenues of $50.22 million for the second-quarter, but expenses just eclipsed this at $52.3 million.

For the first-half of 2019, ILS operating revenues reached just over $103.6 million for Markel, but ILS operating expenses hit almost $112.9 million, so again outpacing the revenues earned.

ILS related revenues should continue to build at Markel, as the Nephila Capital portfolio’s shed any remaining trapped collateral and side-pockets and profit share related earnings become more consistent again as the major catastrophe years of 2017 and 2018 move further behind it.

In addition, the launch of a new retrocessional reinsurance investment manager towards the end of this year has the potential to add new revenues as well, perhaps enabling us to see the real potential of Markel’s burgeoning interests in insurance-linked securities (ILS).

Markel Corporation Co-CEO’s Thomas S. Gayner and Richard R. Whitt, commented on the firms results, “All three of our operating engines made meaningful contributions to our results in the first six months of 2019.”

We haven’t yet really had a chance to see how the relatively newly acquired ILS engine will contribute, but it has the potential to be a meaningful driver of recurring operating revenues for Markel, so it will be interesting to see how it builds once the new retro unit is up and running at year-end.