Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Credit Suisse moves Sandy side-pockets back to main portfolio


Insurance-linked securities and reinsurance-linked investments manager Credit Suisse has now fully resolved the potential exposure its CS Iris Low Volatility Plus Fund Limited had to last years hurricane, or superstorm, Sandy event and has moved side-pocketed investments back into the main fund portfolio.

When a catastrophe event strikes and the estimates of the insured losses or impact to specific investment positions suggest that specific reinsurance contracts may be at risk of paying out ILS fund managers typically segregate those investments into what is termed a side-pocket of its fund.

This practice means that the exposure is kept separate from the main fund, which allows ILS fund managers to continue to take in new investment capital without new investors becoming exposed to previous catastrophe events. Only investors already invested in a fund can be exposed to the events and the specific contracts or positions become illiquid as the final loss tally is awaited.

In the case of superstorm Sandy, Credit Suisse had twelve investment positions that it felt could be at risk depending on the size of the final insurance industry loss estimate from the storm. The contracts were industry loss trigger based, likely industry loss warranties (ILW’s), and Credit Suisse had to wait for the final loss estimate from PCS to know whether they were affected or not.

Back in February, Credit Suisse examined the twelve investments based on the latest loss estimate from PCS, which stood at $18.75 billion at the time, and decided that eight of the twelve illiquid investments could be released back into the main CS Iris Low Volatility Plus portfolio.

According to Credit Suisse’s latest update on these investments, the final estimate of insurance industry losses from PCS in late July did not raise the figure any further which means it now knows there will be no impact to the remaining four illiquid investment positions.

The investments can now be valued again, according to Credit Suisse, with a sufficient level of certainty that they won’t be impaired and the counterparties to the contracts have now released the associated collateral. The final estimate of insurance industry losses caused a slight change in the valuation of the side pocket, approximately -0.12% development as a percentage of the net asset value of the fund for 31st October 2012.

The four positions are to be moved back into the main fund portfolio as of a valuation point of the 30th August 2013. The remaining S class shares, the class the side-pocketed shares were converted to, will now be converted back to normal fund shares for shareholders with investments affected by the side pockets.

This finally resolves Sandy for Credit Suisse’s CS Iris Low Volatility Plus Fund and as a result for the DCG Iris ILS investment fund as well, which acts as a feeder into CS Iris.

The whole story of superstorm Sandy, the way investments were segregated and side-pocketed by ILS fund managers as they waited for final loss estimates, is a good example of the way fund managers seek to keep investments safeguarded from developing loss events. Credit Suisse will not be the only investment manager to have been able to release side-pockets as a result of the loss estimate remaining below $20 billion, a key trigger point for industry loss contracts.

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