Credit Suisse has issued another update on the potential impact hurricane Sandy has had on one of their insurance-linked security and catastrophe bond funds, the CS IRIS Low Volatility Plus fund. Credit Suisse are not changing their estimate from last week (which we discussed in this article here) yet, but says that if insurance industry loss estimates rise much further the loss suffered by their ILS funds could increase disproportionately.
The latest update was published by the DCG Iris ILS fund, which Dexion Capital look after, and which acts as a feeder fund for and invests substantially all of its assets in CS Iris.
Credit Suisse notes that on Friday the estimates from risk modelling firms for losses from Sandy increased, with the average rising to $13 billion. Credit Suisse had given their own estimate of $14 billion to $18 billion last week and say that the range remains their working assumption for the moment. However, for their weekly NAV estimate they are being more pessimistic and have gone with an industry loss of $18.5 billion. This means they are hoping that is the maximum so that they don’t need to decrease NAV estimates in the future, generally funds would rather over-estimate and then surprise investors by reducing a loss, rather than increasing it.
Credit Suisse said; “We need to emphasize that, despite our having analyzed every single position, there remains significant uncertainty on both the estimates and on the insurance market loss as a whole. It may well be lower as modeling firms currently suggest, but it may also be higher.”
This uncertainty is clearly worrying Credit Suisse as within the update they also noted that should the industry loss be above $20 billion then the losses to their fund increases disproportionately. This suggests that Credit Suisse are exposed to contracts with a $20 billion industry loss trigger, either in the form of private reinsurance contracts, industry loss warrants (ILWs) or perhaps even private ILS transactions. Given the time it is taking for the U.S. to recover from Sandy, and the increasing concerns about business interruption and contingent business interruption claims, it is by no means certain that losses won’t hit that level when all tallied.
Credit Suisse said; “We have used the assumption that the total insured industry loss is 44% above the average modeled loss estimated by modeling agencies in order to reflect that uncertainty.”
At the moment Credit Suisse continue to stick with the same NAV impact to their funds and will wait for further development of loss estimates before changing that. Credit Suisse will not be the only fund manager who is concerned about the $20 billion industry loss figure, many reinsurance funds and entities would see their exposure increase disproportionately at that point as it is the next trigger point for so many contracts. While that would represent quite an increase from the current modelled $13 billion average industry loss estimate, it can’t be ruled out until further analysis on the extent of claims has been completed.
We’ll update you if/when we hear any more.