Markel won’t lean property after market hardening and casualty woes
Markel will retain its lean towards casualty lines despite 2023 underperformance in the segment and hold off on more property exposures despite that market's hardening, handing that opportunity over to third-party investors at its ILS unit Nephila instead, CEO Tom Gayner (pictured) indicated in his letter to shareholders.
Nat cat exposures will continue to be reduced, irrespective of what impact is wrought by climate change, Gayner said, citing the 2023 wildfires in Hawaii as only the latest example of outsize nat cat hits.
“Whether these events stem from climate change or not, we continue to reduce our exposures to these sorts of events,” Gayner said. “We also continue to raise rates to reflect the higher costs of covering catastrophe losses.”
The property risks that are underwritten by Markel will continue to be shuffled into the hands of third-party investors served by ILS unit Nephila, Gayner said. Markel prefers to book the fee income via Nephila rather than have the more volatile combined ratio points sit up against its own balance sheet, Gayner indicated.
Large property exposures are “better served through the ILS market rather than on a traditional insurance company balance sheet,” Gayner said of his group’s historic move to push business at Nephila.
Strong returns for third party capital in 2023 at Nephila should help the unit turn the corner on capital flows in 2024 after another year of net outflows in 2022.
“We expect that Nephila’s results will begin to attract positive attention from their investors,” Gayner wrote in his lengthy missive to shareholders.
A rise in AuM would be a welcome development. Nephila only managed to stem net outflows as of Q4 and total AuM of $6.8 billion are down nearly a third from a Q2 2021 peak. Q3 had still shown heavy outflows of capital freed from side-pockets, although such outflows offered a boost to fee income.
“We expect assets under management to begin to grow again following the underlying performance of what Nephila investors earned in 2023.”
Nor does Markel’s 2023 underperformance in key casualty lines merit any rebalancing of the top-level business mix, Gayner seemed to indicate.
Markel “fell short” in anticipating the impact of social inflation in select lines in 2023 and is now responding by lowering limits, tightening T&C, rebalancing the portfolio and diving deeper into data to accelerate feedback loops, Gayner said in a reiteration of messaging on display when the group reported its Q4 earnings.
Casualty remains less volatile than property and performance between the major business segments is balanced over a longer-term, Gayner argued.
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