Markel Corporation earned an impressive $25.3 million of operating revenues from its insurance-linked securities (ILS) manager Nephila Capital in 2018, despite only having acquired the firm in mid-November.
In addition, Markel also registered $66.2 million of ILS related revenues from its Markel CATCo retrocessional reinsurance investment operations during the year as well.
This income earned from its ILS investment management operations is a significant boost to the bottom-line for Markel and the fact Nephila delivered $25.3 million after less than two months is telling of just how high that figure could be after a full-year.
$24.4 million of the Nephila revenues are related to investment management fees earned from the acquisition date through to the end of 2018.
With its significant over $11.5 billion pot of ILS capital, Nephila Capital looks set to deliver triple digit millions in revenues for Markel through management fees and the like.
In a relatively loss-free underwriting year, that could be even higher, as profit shares on reinsurance contracts written and ILS structures invested in could provide a further significant boost. Could that even reach as much as $150 million (maybe $200m) or higher per year in total? It definitely seems possible.
The acquisition of Nephila Capital cost Markel a total consideration of $975 million, which if the ILS manager can deliver the levels of revenue it seems it can, seems an attractive price when considered over the longer-term.
Alongside the $66.2 million that Markel CATCo delivered, despite all of the challenges that reinsurance investment manager has faced in 2018, the near $92 million of ILS related revenues are a considerable sum and show precisely why Markel was attracted to buy its ILS operations.
Of course, to say the fee income and profits are the only benefit is to undersell the value of Markel’s in-house ILS managers.
As the potential efficiencies these operations can add across the firm could be significant in the future, especially as synergies are found for channeling risk through to the capital markets from Markel’s own underwriting in years to come.
If Markel’s ILS investment management business can deliver this kind of operational revenues on an ongoing basis, the firm can expect to pay back its investment in Nephila Capital relatively quickly, especially once a full year of revenues flows through in a year with lower catastrophe activity and therefore higher performance fee income as well.
Whatever the fate of Markel CATCo, following the news of a possible run-off of its exchange listed retro reinsurance fund yesterday, Markel has likely got a taste for the potential revenue this business can deliver at scale, so we should expect expansion of the strategies to continue.