Markel hopes to add new ILS inflows during second-half: Co-CEO Whitt

Markel Corporation hopes to see fresh inflows coming into its insurance-linked securities (ILS) business in the second-half of 2020, as the capital markets become less volatile and investor confidence recovers, according to Co-CEO Richie Whitt.

As we explained yesterday, insurance-linked securities (ILS) assets under management have declined at Markel’s flagship ILS unit Nephila Capital, falling around 5% in the last quarter to $9.5 billion.

At the same time, Markel’s CATCo unit, which is winding down and running-off its catastrophe loss impacted portfolios of ILS assets, is also shrinking, as it returns capital to its investors.

In the first-half of 2020, Markel CATCo has returned $900 million of its capital to investors and now AuM at the retrocessional reinsurance focuses asset manager has shrunk to $2.1 billion.

Markel also has its start-up retro reinsurance focused investment management unit Lodgepine Capital Management, which is awaiting its launch and this appears to be being held back for 2020 due to capital market conditions, as we explained previously here.

The upshot is lower ILS AuM at Markel, now around $11.6 billion deployed, with $100 million still committed to the Lodgepine launch, which has the effect of reducing management fees in the ILS division of the firm.

But Co-CEO Whitt believes that there are signs investors are readying for allocating to ILS again.

Now, “I think the outlook is positive,” Whitt explained during his firms quarterly earnings call yesterday.

He noted that in the previous quarter investor’s decisions on asset allocation were “basically frozen”, but added that this may now be coming to an end.

“As things have rebounded, as there’s been a little more calm in the markets,” Whitt said, “We have definitely seen an uptick in terms of conversations.”

“People are getting more comfortable with doing their due diligence virtually as opposed to on-site,” he continued.

Adding that, “So we’re very hopeful that we will see additional mandates in terms of AuM in the second-half of the year.

“It feels very different today than it did back in March or April.”

Later during the call, Whitt commented again that, “We are very optimistic in terms of our opportunity to raise capital into the second-half of the year and even more so into 2021.”

Whitt also commented specifically on Lodgepine, saying that, “We have seen a significant change in tone, and in the amount of conversations and amount of due-diligence that’s going on is picking up.”

He said that the Lodgepine book, being retrocessional reinsurance, is largely a January 1st renewal cycle book, so positively, “People aren’t going to make their decisions until into the fall, as to whether they want to invest. We’re having some great conversations. But I think just the way the calendar works, we’re not going to have signed commitments until sometime in the fall.”

And so quite honestly, people aren’t going to make their decisions until probably into the fall as to whether they want to invest. We’re having some great conversations, but I think just the way the calendar works, we’re not going to have signed commitments until sometime in the fall.

Whitt’s comments align with those of ILS fund managers we have spoken with of late, who say that investor interest is actually quite high right now in ILS fund strategies, as well as other reinsurance investment opportunities and that the hardening of the market is helping to drive interest even higher.

It’s more a question of investors getting beyond the period of extreme volatility associated with the Covid-19 pandemic and becoming comfortable that making longer-term allocations is the best use of their capital right now.

Many institutional investors have been very focused on shorter-term gains in recent months, as they’ve ridden the recovery wave after the initial pandemic hit to financial markets.

But as the focus returns to longer-term portfolio management and allocation goals, the valuable diversifier that is ILS and reinsurance looks more valuable than ever and should encourage inflows to the established managers in the sector to resume and perhaps accelerate.