Nephila drives rising ILS revenue for Markel, but AuM shrinks again to $9.5bn

Nephila Capital, the largest dedicated insurance-linked securities (ILS) investment manager in the industry, has continued to drive rising ILS related revenues for parent Markel Corporation in the second-quarter, but its assets under management declined further, ending June at $9.5 billion.

Markel, the global insurance, reinsurance and investment group, positions insurance-linked securities (ILS) as a significant area of opportunity in its business, having acquired its way into the space, buying first CATCo Investment Management and then Nephila Capital, as well as program fronting specialist State National.

Then more recently, Markel launched Lodgepine Capital Management as a new retrocessional reinsurance focused ILS investment management unit.

Markel’s flagship ILS fund manager Nephila Capital has driven impressive income and revenue to its parent since the acquisition, which continued in the second-quarter of 2020.

But the ILS businesses are not immune to the effects of the global COVID-19 pandemic and Nephila Capital’s assets under management has fluctuated through recent months, likely due to the effect of global capital market volatility, potentially driving some redemptions during recent quarters.

Back at the end of the first-quarter, Markel reported that Nephila Capital’s ILS assets under management fell by approximately $400 million, or 4%, from $10.4 billion at the end of 2019 to $10 billion as of the end of March 2020.

The decline continued in the second-quarter of 2020, with Markel now reporting another roughly $500 million fall in AuM for Nephila, with the ILS managers net assets under management reported as $9.5 billion at the end of June 2020, so another 5% decline in the quarter, or down almost 9% since the end of 2019.

It reflects what Nephila Capital Co-founder Frank Majors told us in a video interview earlier this year, when he explained that the company had seen low mid single-digit redemptions from investors due to the economic climate induced by the coronavirus pandemic.

Majors said that the level of redemptions was not surprising, given large institutional investors need to rebalance portfolios after a major hit across financial markets like was seen due to the pandemic.

It seems a level of redemptions continued into Q2, perhaps not surprising when you consider the number of end-investors a manager with $10bn+ of assets has relationships with.

But assets aside, the insurance-linked securities (ILS) business continues to deliver benefits in terms of income for Markel, with the company reporting $54.6 million earned for the second-quarter of 2020 and $107.7 million for the first-half.

In the prior year 2019 the equivalent figures were $50.2 million and $103.6 million.

Unconsolidated entities managed by Nephila and Markel CATCo drove $46 million in Q2 2020 and $89.9 million in the first-half, which was down slightly on the prior years $47.3 million and $100.1 million.

But Markel noted that it experienced higher revenues from its Nephila Capital operations, driven by an expansion of its managing general agent activities at Lloyd’s.

This was partially offset in the period by lower revenues from its in-run off and winding down Markel CATCo operations.

Markel further explained that Nephila Capital’s revenues were offset by other factor, including lower investment management and incentive fees earned on side-pocketed investments subject to development, as well as the redemptions experienced in 2020.

Overall though, the $107.7 million of ILS related revenues reported by Markel is slightly on the $103.6 reported in the first-half of 2019, which is impressive given AuM has declined further at Markel CATCo as it runs off, while Nephila has also experienced a decline in AuM and impacts from some trapped capital.

In all periods reported, Markel noted that Nephila Capital’s operating revenues exceeded the related services and other expenses in the period.

The ILS segment at Markel is experiencing high costs still, due to the running-off of Markel CATCo and also start-up costs associated with Lodgepine. Once these costs decline, a better picture of the profitability of the ILS operations should become available to us.

On the assets shrinking and potential trapping of some collateral, it’s not surprising that Nephila, as the largest ILS fund manager in the business, would experience some impacts from a tail event like the Covid-19 pandemic.

Given its reach into institutional investor markets and the scale of its underwritten portfolios, some exposure both at the investor and risk level were to be expected.