Swiss Re Insurance-Linked Fund Management

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DCG Iris returns 1.88%, increases allocation to cat bonds, says interim report


Investment manager Dexion Capital’s has published the first half-yearly report for its insurance-linked security (ILS) fund offering DCG Iris Ltd. The report which looks at the period from launch in June 2012 to the end of November, provides an overview of the funds progress and reveals that over that period the fund returned 1.88%. The return would have been higher were it not for the impact of hurricane Sandy which caused the company to initiate side-pocket investments.

The DCG Iris ILS fund was launched with £40.1m of capital and floated on the London Stock Exchange in late June. The fund acts as a feeder fund and allocates all of its capital assets in Credit Suisse’s CS IRIS Low Volatility Plus Fund, which predominantly invests in catastrophe reinsurance contracts, catastrophe bonds and instruments such as ILW’s. The fund is now £51m in size after a second share offering raised an additional £11m and listed the new shares in December.

Over the course of its first few months in business the DCG Iris fund has made a total return of 1.88%, which is slightly below their targets but takes into account the mark-to-market impact of hurricane Sandy on a number of positions DCG Iris holds. The manager of the master fund Credit Suisse implemented side-pocket investments in late November to segregate the at-risk portions of their portfolio to ensure losses were contained. At this time they await the final outcome of the industry loss total, but even a worst case scenario is expected to only have a minimal impact on DCG Iris.

DCG Iris ILS fund return

DCG Iris ILS fund return

In the report the investment manager of the Master Fund, Credit Suisse, provides some insight on their fund and its composition over the reporting period. The CS IRIS Low Volatility Plus Fund has now grown to $490m in size thanks to steady inflows of new capital through the second half of 2012. Credit Suisse said that the portfolio is now “fully ramped up” and the new inflows will allow it to take advantage of the end of year renewal cycle. We’d imagine much, if not all, of the capital will now be deployed.

The CS Iris Low Volatility Plus Fund continues to focus on natural catastrophe risks and the manager said that man-made risks are still attractive enough to tempt it into allocating some capital to them. Catastrophe bonds have now become more of a focus within the CS Iris Low Volatility Plus Fund thanks to heavy new issuance in Q4. Credit Suisse has now increased the funds exposure to cat bonds to 19%.

On hurricane Sandy, Credit Suisse said that it expects to be able to move some of the affected investments out of the side-pocket and back into the main fund during the first quarter of the year. We suspect that it will be able to action this after the next PCS industry loss estimate is released later this month, as long as the estimate is within its expected range. On the plus side, the impact of Sandy is recognised as having enabled better pricing to be achieved at year-end reinsurance renewals.

The majority of the master funds performance is attributed to insurance-linked swaps, with insurance-linked securities and catastrophe bonds making up the remainder. Cat bonds are likely to increase their contribution to the returns in the next half-year due to the greater proportion of the fund they make up.

Perils wise, the fund has its largest exposure to U.S. hurricane at 30% of potential liabilities, U.S. earthquake at 28%, European all natural perils at 16% and Japan typhoon at 5%. In total the master fund holds 89 positions, 21 insurance-linked securities and has 39 counterparties.

DCG Iris will seek to grow its assets under management further during 2013. It had set itself an unofficial target of reaching £150m by June 2013 although the delay to its second offering due to Sandy could affect this goal slightly. Chairman of DCG Iris Talmai Morgan said in the report; “Further Placing Shares may be issued in the course of the remainder of the financial year, to raise additional funds for investment in accordance with the Company’s investment policy.”

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