Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

DCG Iris C Shares to convert back to Ordinary on reduced Sandy uncertainty


The DCG Iris insurance-linked securities fund, operated by investment manager Dexion Capital, will soon have the 11.025m £1 Sterling C Shares it recently issued converted back into Ordinary Shares, now that it has a much clearer picture of the potential for losses caused by hurricane Sandy. The reason the C Shares were created in the first place was to safeguard new investors allocations from potential Sandy losses, now the impact of Sandy is clearer the shares no longer need to remain segregated.

Last week Credit Suisse, the manager of the Master Fund to DCG Iris, the CS Iris Low Volatility Plus fund, announced that on the basis of the second PCS industry loss estimate of $18.75 billion for Sandy, it was reducing the side-pocket it had created to segregate potentially impacted investments. Credit Suisse said it would reduce the side-pocket which had been large enough to account for 4.9% of the funds NAV right down to just 1% of NAV.

So, as the potential worst case impact to DCG Iris from hurricane Sandy is now just 1% of net asset value, the managers have decided to fold the C Shares back into the Ordinary class of shares. When this happens, which will likely be later in February at the final NAV calculation for the 31st January, the worst case exposure of DCG Iris to the side-pocket investments (and hence to Sandy) will actually be around 0.8% of NAV (given the additional size of the Ordinary share class).

We assume that this does now mean that all DCG Iris investors now have some exposure to Sandy losses, including those whose investments were segregated as C Shares, but the exposure is now so small at roughly 0.8% of NAV that this is manageable.

In the same announcement it was declared that 98.73% of the assets in the C Shares had been committed to be invested in a portfolio within the Master Fund. Once the conversion is complete DCG Iris’ Ordinary share class will be back to full strength at a size of just over £51m.

It has been interesting to follow how Dexion Capital and Credit Suisse have managed the exposure to hurricane Sandy. By keeping investors and the market informed it will have helped to give the current, and future, investors confidence in the relatively new DCG Iris funds processes.

It is likely that we will not know whether the investors actually face a loss of all or part of the 0.8% exposure to Sandy until the final PCS loss estimate is released as it appears that is the trigger for the exposures Credit Suisse had established the side-pocket for.

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