No impact, so far, to ILS funds from recent earthquakes


Strong and damaging earthquakes have taken place around the world in recent days, with quakes in New Zealand and China most likely to result in losses to insurance or reinsurance firms. So far, the insurance-linked securities (ILS) fund managers who have reported on these events, suggest that there will be no impact to ILS funds.

The earthquake that struck New Zealand in the Wellington region was a strong and reasonably shallow M6.5 quake which hit on Sunday, July 21st. Damage from this quake was largely minor, although quite widespread across the Wellington metropolitan area.

The earthquake that struck China occurred on Monday 22nd July was a M5.9 quake in the Gansu province of China. This quake has killed around 100 people and injured many hundreds more, according to reports, with significant damage in rural regions where building standards are poor.

The first to report on these events was Swiss based ILS and catastrophe bond investment manager Plenum Investments. For Plenum the impact is simple to establish, there will be none, as the investment manager deals solely in catastrophe bond assets. As Plenum noted, neither China nor New Zealand earthquake risk are covered by cat bonds, meaning there will be no impact to the performance of its fund.

The same can be considered true of all other catastrophe bond focused ILS fund managers, they will not see any impact from these events. The majority of other ILS fund managers who are largely focused on cat bonds, and write some collateralized reinsurance to fill in portfolio gaps, will also likely be ok as it is unlikely they will be taking on these quake risks.

Investment manager Credit Suisse reported on the potential for impact to its CS Iris Low Volatility Plus Fund, the master fund to the Dexion Capital managed DCG Iris fund, said that the New Zealand quake could have been worse. The NZ earthquake had a higher magnitude than the Christchurch earthquake from 2011 but ground acceleration was significantly lower, meaning that damage can be expected to be much lower.

Credit Suisse said that it is expected that damage from the Wellington earthquake is expected to be only approximately 10% of that seen in the 2011 earthquake in New Zealand. As a result, it said that early insurance industry loss estimates suggest a loss of less than $1 billion.

Based on that level of loss estimate Credit Suisse said that it does not expect any impact to the CS Iris Low Volatility Plus Fund. However, it noted that losses take time to develop after events such as these and that it would provide an update should estimates and circumstances change significantly.

We’ve spoken with a number of other ILS fund managers earlier today and all have sais that they don’t expect any impact from these events on the sector. Even those fund managers underwriting high-severity retrocessional contracts said that the industry loss would be too low for there to be any major impact to their investments.

Should any impact to any ILS fund from these events become apparent we will update you further.

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