Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Francogeddon unlikely to hit Swiss ILS funds, positive for asset class


The Swiss Central Bank’s (SNB) surprise move to abandon the currency rate cap on the value of the Swiss franc against the Euro, which has been dubbed Francogeddon by affected traders, is unlikely to have much impact on the ILS market it is thought.

The SNB’s move took the markets by surprise when it said the cap, which had been in place since September 2011, was no longer justified. At the same time a key interest rate was cut from -0.25% to -0.75%, effectively increasing the amount that investors pay to hold Swiss deposits.

The effect on currency markets has been swift, with the Swiss franc rising by around 30% in trading and at least one currency brokerage, Alpari, declaring its UK arm out of business as a result of the impact of trading losses caused by the movement in the franc.

The widely felt impact of a central bank removing the peg which held its currency against the Euro has not been too severely felt in the insurance-linked securities (ILS) market it seems. Despite a number of ILS investment managers being headquartered in Switzerland, and many of their funds having Swiss franc (CHF) denominated share classes, those we’ve spoken to say there will be little impact.

The reason for this is that ILS fund share classes are typically currency hedged by the managers in order to protect their investors against any such sudden moves in a currency. As a result there is no impact to the net asset value of a fund, although some managers may need to make a larger hedging payment than normal as the hedging is typically on a month-to-month valuation basis. There is also the potential for rate movements to make hedging more expensive in future, however any additional payment for hedging is expected to be slight and wouldn’t be borne directly by investors we believe.

The SNB’s move also raises questions about a recent catastrophe bond transaction, the Leine Re private cat bond which is the first cat bond to be denominated in CHF, and whether that could be impacted.

ILS investment managers we’ve spoken with say it will not be. The reason for this is that the sponsor, the bond and the investors are all aligned as far as currencies are concerned on a single transaction such as this. However, with the value of the CHF having risen the Leine Re notes may make up a slightly larger proportion of an ILS portfolio that has invested in it.

Perhaps most interestingly though, the move could actually serve to make ILS and catastrophe bonds an even more attractive asset class for Swiss institutional investors and Swiss pension funds. The SNB’s action once again helps to demonstrate that ILS as an asset class has very little (to zero in some cases) correlation with market moving issues such as this.

As a result the SNB’s move may prove to be positive for the ILS market as a whole. In fact, it has been reported that Swiss pension funds may have seen as much as CHF 30 billion of their pension assets wiped out (according to IPE) by the currency and rate movements caused by the SNB’s decision to remove the cap.

Had those Swiss pension fund assets been invested in ILS, catastrophe bonds or collateralized reinsurance funds, it is possible that they might not have lost any value at all.

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