Despite paying out $400mn in claims in 2017, the collateralised retro fund manager Markel CATCo said today (12 March) that more than half of its year-end net assets in its listed CATCo Reinsurance Opportunities Fund are tied-up in sidepockets to pay for further losses and potential creep from last year’s cat events.

2017 CAT pain table

According to the fund-manager, 55 percent of its 31 December 2017 ordinary share NAV has been put into sidepockets.

ILS fund managers use “sidepockets” to ringfence capital in a fund that is exposed to a loss or potential losses. It means fresh capital that is raised is not exposed to these legacy losses.

The listed fund’s NAV actually increased in 2017 following two fund-raisings: a $45.9mn in the first half of the year and a notable $546mn via a new C Share issuance in December 2017, after the losses.

According to the fund manager, total net assets in its listed fund increased from $463.6mn to $884.6mn. It separately said today that it had paid out $400mn in claims in 2017 primarily in “relation to the 2017 Hurricane Irma, Hurricane Harvey and Hurricane Maria events and the 2016 Jubilee Oil Field and Canada Wildfire events”.

Collateralised writers – who put up capital in escrow trust accounts as security in lieu of a financial strength rating - faced a double whammy last year from the scale of the losses but also from the collateral requirements which oblige them to tie-up significant amounts of capital over and above loss notifications to protect the cedant from loss creep.

The difficulty for these carriers is that this “trapped” capital cannot then ordinarily be used as collateral for underwriting new risks until the capital is released.

Below is a standard “buffer table” for retro writers that reveals they must retain 250 percent of capital against loss notifications for the first three months and then 200 percent up to 6 months. Only after 18 months does it drop to 100 percent. Other tables – for example for quake cover – can be even more onerous with 300 percent or higher requirements.

In addition to the listed fund, Markel CATCo manages private funds that also feed into the company’s Bermudian reinsurer, which provides collateralised pillar-style retro protection. The listed fund had a 16 percent share of the master fund at 2017 year end which suggests at the end of 2017 the company had around $5.5bn assets under management.

Example of a standard buffer loss table