Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Credit Suisse implements side-pockets for Sandy exposed investments in CS Iris


In a report sent to investors in its CS IRIS Low Volatility Plus Fund, investment manager Credit Suisse has announced that they intend to implement side-pockets for any investments potentially exposed to losses from hurricane Sandy. A side-pocket will allow Credit Suisse to effectively segregate the investments that are at risk from the rest of the fund, ensuring that future changes in value on investments exposed to Sandy only impact investors who had committed to the fund at the time of the event.

Side-pocketing at-risk portions of a reinsurance, insurance-linked securities and catastrophe bond investment fund is a common occurrence when there is uncertainty around the level of losses from an event. By segregating Sandy losses, it means that new investors in CS Iris will not have an exposure to the hurricane. As such it’s a sensible move for a fund manager to make, especially if they want to continue to attract new capital to their fund offerings.

According to the report from Credit Suisse the CS Iris Low Volatility fund is 33.2% exposed to northeast U.S. hurricane risk. Given the significant uncertainty that remains around the final industry loss total for hurricane Sandy, Credit Suisse has decided to side-pocket all of those northeast U.S. hurricane investments exposed to events causing an insured industry loss of up to $35 billion. That corresponds to 4.9% of the net asset value (NAV) of the fund as at the date of the side-pocketing which was the 31st October.

The uncertainty around Sandy’s loss estimates has effectively made a large portion of the CS Iris fund illiquid, said Credit Suisse, meaning that until there is more certainty the guarantees and collateral associated with exposed positions cannot be released. Investors in the fund at the 31st October will be issued with special classes of shares for the Sandy exposed portion of the fund and the assets in the main fund share classes will have their NAV reduced by a corresponding amount. Any investors in the fund after the 1st November will not be affected and will only allocate capital to the non-Sandy exposed portion of the assets.

Credit Suisse has chosen to side-pocket exposures up to an industry loss of $35 billion so as to give a buffer to the exposed assets in case of loss creep. They say they are still working on an estimate of $18.5 billion for industry loss triggers and on $20 billion for indemnity triggers.

Once the uncertainty around the hurricane Sandy industry loss and indemnity loss is cleared up there is a chance that Credit Suisse may merge the side-pocketed investments back into the main fund. This is normal practice and would also allow the main fund to benefit from any additional mark-to-market recovery on those investments value after the uncertainty is cleared.

This announcement is also relevant to the DCG Iris insurance-linked securities fund managed by Dexion Capital which invests substantially all of its assets in the CS Iris Low Volatility fund.

Credit Suisse has other funds in the CS Iris range, including the Iris Balanced  and Iris Enhanced funds. Interestingly we’re told by contacts that of the three funds the Enhanced saw the biggest hit in October with a negative performance of -4.51%. We don’t know how much exposure that fund has but assume that a similar report has been published detailing the establishment of side-pockets. For the Balanced fund October saw a negative performance of -0.95% we’re told and we’d expect that fund to also have a side-pocket strategy now. The Low Volatility fund actually reported a positive return in October of 0.34% so it seems safe to suggest that the exposure in the Balanced fund to Sandy is greater and the Enhanced fund much greater.

This is the first fund we’ve heard has put a side-pocket in place to protect its future investors from any impact from hurricane Sandy. It’s the right approach and will give new investors the confidence required to continue allocation capital to the CS Iris fund range.

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