More hurricane Ian side pockets resolved with no loss for ILS funds


We’ve learned that the hurricane Ian side pocket investment situation has improved considerably for some insurance-linked securities (ILS) fund managers, with a number of key exposures now failing to reach the levels of cedent loss needed to attach coverage in recent weeks.

As a result, we’re told that more hurricane Ian side pockets that ILS fund managers had established are able to be fully resolved, with zero loss to the funds investors.

This continues a trend of steadily improving loss outlook in numerous cases, as the ceding companies losses from hurricane Ian have developed.

It shows both the value to cedents of being able to hold and retain collateral, with trapped collateral meaning the funds are still available to them should their ultimate net losses after a catastrophe event reach above the attachment point for their reinsurance or retrocession coverage, after they have been allowed to develop.

While also showing the benefit of the side pocket as a tool that ILS investment managers can use, to segregate potentially loss-affected assets away from the fund and its investors, allowing for that loss development to occur without affecting the funds overall valuation or their ability to onboard new investors and take on new capital inflows while that development continues.

ILS fund managers set up side pocket investments as a tool that allows for the segregation of assets which are exposed to a major catastrophe event and have not yet attached, but could do if the losses develop or creep too much higher.

They provide a reserving mechanism of sorts for ILS fund managers, trapping the collateral linked to the assets that are exposed, to ensure it remains available to pay off any valid claims, or reinsurance recoveries that are eventually made.

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As cedent and industry losses develop, the cedent’s reinsurance provisions remain available to them, held securely in a side pocket of the investment fund in case the specific reinsurance or retrocession contract attaches.

Ever since major hurricane Ian wrought its September 2022 damages on Florida, many of the side-pockets that ILS funds had established have consistently proven to be more than sufficient for the eventual quantum of losses that cedents utimately reported.

Back in November 2022 we reported that side-pockets set up by ILS funds for hurricane Ian, focused on private deals and collateralized reinsurance or retro contracts, tended to range from as small as 3% to as much as 30% of a specific ILS fund strategy.

So, some of these were quite considerable, resulting in concerns over the level of losses some strategies might suffer.

But, by January 2023, some of the side-pockets established by insurance-linked securities (ILS) funds after hurricane Ian were already being reduced in size, as estimates from the storm continued to trend lower than originally anticipated.

Then, in April, we wrote that some ILS fund managers were able to further reduce the size of hurricane Ian related investment side pockets, as the loss clarity improved further.

When we last reported on this in July, we had learned that some ILS fund managers were able to close down certain side pockets related to hurricane Ian completely, as the loss estimates had been finalised, any reinsurance recoveries due had been paid, and the remaining collateral and capital flows back to their ILS funds.

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Now, in another positive sign of the ultimate ILS market impact from hurricane Ian being far lower than once feared, we’ve been told that in recent weeks some additional side pockets have been resolved, some without any loss at all, as the cedent has reported their finalised loss for the hurricane event.

The cedent reinsurance recoveries made were already proving to be significantly smaller than the remaining side pocket capital, even after some side pockets had released some of the trapped capital back to their funds.

Now we learn that some are being resolved with no loss at all, with trapped capital set to be released over the next few weeks and returned to funds and investors.

It means even more trapped capital being released back to ILS managers and potentially available for recycling to use again at the end of year reinsurance renewals, which will put some ILS fund managers back on an even better footing, even without significant fresh inflows.

Over the last year, the amount of deployable capital in the ILS market has steadily risen, new inflows aside, as capital trapped after hurricane Ian has been released and some made available again.

It’s also good news for ILS managers, as side pockets and managing them can take considerable time, so freeing up these, especially before renewals, is always desirable.

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