Swiss Re Insurance-Linked Fund Management

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Hurricane Ian estimates trend lower, some ILS fund side pockets reduced


Some of the side-pockets established by insurance-linked securities (ILS) funds in the wake of hurricane Ian are now being reduced in size, as estimates from the storm continue to trend lower than originally expected, according to Artemis’ sources in the ILS investment community.

ils-fund-side-pocketThis applies to ILS funds that allocate capital to and invest in private deals, such as collateralized reinsurance or retrocession contracts, we’re told.

As we reported last November, side-pockets that were set up by ILS funds 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 strategy.

These side pockets are established in order to segregate potentially loss affected investments from the rest of an ILS fund portfolio.

When we reported back in November, on the private ILS fund side pockets being established for potential losses from hurricane Ian, we said that there was every chance some ILS fund strategies with investments into collateralized reinsurance and retro found their reserves were set higher than needed, as the claims process played out.

We’re now told that this has been seen to be the case, with a number of ILS fund strategies where side pockets have been reduced in recent weeks, as greater certainty and lower than anticipated loss estimates come out of some cedents.

This mirrors the experience of the catastrophe bond market, which marked down the exposed outstanding stock of cat bonds heavily after hurricane Ian, but has since seen some quite significant recoveries in valuations.

It’s worth remembering that the Plenum CAT Bond UCITS Fund Indices had fallen heavily straight after hurricane Ian, but has since recovered strongly.

In fact, the cat bond market losses from hurricane Ian look set to be half, or even less, than the initial mark-to-market implied losses that were seen.

In collateralized reinsurance and retrocession our sources suggest the recovery is unlikely to be of the same proportion, as losses from hurricane Ian must fall somewhere and it was a very major storm, but we’re told some ILS funds have been able to liquidate a reasonable percentage of their side pockets, returning assets or capital back to the main fund.

As new and updated cedent loss reports are released, ILS fund managers gain greater certainty over the valuations of assets in their side pockets.

In recent weeks, we’re told certainty has risen significantly related to some cedents, with some reductions in loss estimates as a result.

This has allowed some ILS fund managers to unwind a percentage of hurricane Ian side pockets that had been set, a positive development for their investors.

This is particularly positive, as over the last five or more years it has unfortunately been relatively common to see side pockets set and nothing recovered back from them.

In some ILS fund strategies, investors may have become more accustomed to seeing side pockets lost in their totality, so the recovery being seen after hurricane Ian will provide some encouragement.

We’re told some ILS funds have been able to reduce the sizes of their hurricane Ian side pockets by 10% to 25%, which is a reasonably significant amount given the overall size of this catastrophe loss event.

Where hurricane Ian is concerned, the ILS fund structure and mechanisms used for managing exposure to major catastrophe loss events appears to have worked well.

We are seeing reports from some collateralized and private ILS focused funds that might surprise given the magnitude of hurricane Ian.

The hurricane impact to some ILS fund strategies appears far more favourable than has been seen with storms over the last few years, perhaps reflecting the improvements in the terms and conditions contracts have been underwritten with, while higher pricing will also be a factor.

There’s still plenty of uncertainty though, as hurricane Ian claims, being a Florida loss event, could still be affected by inflation, litigation and loss amplification as development continues.

This means side pockets are likely to persist for some time, but the fact they’ve been reduced at all should perhaps be viewed as a positive for the ILS asset class, compared to prior loss event experience.

It’s important to note that not all hurricane Ian loss estimates are trending lower, we’re told some remain static and some could even rise a little. But the overall trend, across cat bond and ILS exposure to hurricane Ian loss development, has been favourable so far.

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