Nephila ILS revenues rise for Markel, AUM slips to $6.6bn, ILW fronting begins

Markel has again reported an increase in revenues earned through its insurance-linked securities (ILS) investment management business for the second-quarter of 2024, but manager Nephila Capital’s assets under management (AUM) slipped slightly to $6.6 billion by the end of the first-half of the year.

Also notable in the period, Markel began to front ceded reinsurance contracts for the Nephila Capital business for the first time, largely in industry-loss warranty (ILW) form, as the ILS manager looked to better protect itself and provide more downside cover for its investor base.

First, assets under management, which are reported at $6.6 billion as of June 30th 2024, down from $6.8 billion at March 31st.

While a decline, it’s relatively minor and the stability achieved in the Nephila Capital business continues, in the wake of the company dealing with its legacy reserves and eliminating trapped capital for its investors through an arrangement entered into with the help of an adverse development cover (ADC) from its parent, which has put it on stronger footing.

There is likely to continue to be some churn in investors, as has been seen across a number of managers in the ILS space over the last year, as the effects of heavier loss years continue to result in release of capital and exit of certain investors.

As we’d reported back in May, Nephila Capital has also been adding new assets under management, such as in this example where it won a mandate from the Florida State Board of Administration during the first-quarter of this year, to deploy $300 million into reinsurance through Arachne, a Bermuda based ILS structure.

Importantly for parent Markel, the revenue generated by Nephila’s ILS business has risen again this quarter, with $21.8 million earned in Q2 2024 and $41.1 million for the first-half.

Both figures are up on the previous year, when Nephila entities generated $20.8 million in revenue for Q2 2023 and $30.6 million for H1 2023.

Markel reported again that the increased revenues were “primarily due to changes in the mix of investment products within the funds,” something likely to balance out over the entire year.

The Nephila ILS operation drove $3.474 million of operating income for Markel in Q2 2024, up on the previous years $1.762 million. For the first-half the ILS operations still recorded an operating loss, but at -$2.13 million it is narrowing and lower than for H1 2023.

We can really see the effects of the way Markel has integrated the Nephila ILS business in the next data point, where the company reported that gross premiums written by Markel’s program services and other fronting platforms on behalf of Nephila Capital entities reached $741.7 million for Q2 2024 and $1.1 billion for H1 2024, all of which were ceded to Nephila reinsurance vehicles.

That’s up significantly on Q2 2023’s $297.4 million and H1 2023’s $534.3 million, showing that synergies continue to be realised and that by leveraging the program and fronting facilities of its own entities Markel will hope to generate greater leverage for and margin on profitable business underwritten for its Nephila entities, ultimately helping to boost revenues earned as well.

Markel noted “increases on renewals” in relation to the Nephila reinsurance business increased volumes, as well as favorable timing differences, which could potentially mean earlier renewals as well.

This year, Markel has begun utilising its infrastructure to front ceded reinsurance contracts for Nephila, as the ILS manager looked to better insulate its investors through hedging its investment portfolios.

These ceded reinsurance contracts to protect Nephila’s reinsurance entities were primarily in the form of industry loss warranties (ILW), Markel explained, and the process saw the underlying risk of Nephila’s reinsurance entities retroceded back to Markel and then fully ceded out to third-party reinsurers.

Gross written premiums ceded by Nephila under this protection and ILW hedging program reached $168 million for the first-half of 2024, all of which were ceded to third parties, Markel said.

We’d reported before about Nephila’s ILW buying in the first-half, as the manager purchased a relatively significant amount of limit to protect its portfolios. That spend will have had a bearing on revenues and income in the first-half, in the context of which the fact Markel’s ILS revenues continue to improve is even more impressive.

The reinsurance recoverable Markel reports that is attributed to Nephila’s reinsurance vehicles fell further to $687.1 million at June 30th 2024, from $785.9 million of gross premiums at March 31st 2024 and $794.3 million at Dec 31st 2023.

That reduction in recoverable likely reflects the retrocession of premiums through these ILW hedging purchases for Nephila, at least to a degree.

Once again, Markel’s results show the ongoing integration of Nephila’s ILS business into its broader insurance and reinsurance operations and that the company is realising synergies across a wide range of areas of its business, the most recently added being the way these ILW and retrocession purchases were achieved.

With Nephila’s ILS fund strategies likely having performed well through the first-half of the year, given where global catastrophe loss impacts fell for the ILS sector in H1, and the manager well-protected for major catastrophe losses by its new hedging program, Markel will be looking ahead and hoping for a chance to demonstrate the profit generation of its ILS business if the sector gets through the hurricane season without too significant an impact from storms.

As we also reported in the second-quarter, Nephila secured a $90 million catastrophe bond to provide industry-loss based retrocession for its Lloyd’s syndicate 2357.

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