Credit Suisse wins $20mn Aeolus Jebi cat swap dispute

A Bermuda Supreme Court judge has ruled in favour of a group of entities tied to the ILS arm of Credit Suisse, settling a long-running dispute with Bermuda-based Aeolus Re, The Insurer can reveal.

Credit Suisse and Aelous – Bermuda

In a ruling handed down on Friday, Chief Justice Narinder Hargun of the Bermuda Supreme Court dismissed Aeolus’ claim against Credit Suisse, a judgment that requires Aeolus to return $20mn in collateral from Credit Suisse it had held under the terms of a swap agreement entered into by the two parties in early 2018.

The dispute between the two parties had centred on whether Munich Re’s NatCatSERVICE (NCS) – the reporting entity agreed to by both parties to determine whether a triggering event had occurred – had changed its reporting criteria and the frequency of its loss event updates after the swap had been entered into.

Aeolus argued in its suit that NCS had changed the frequency of its loss estimate updates for major catastrophic events, and that absent the change its industry loss estimate for Typhoon Jebi, which struck Japan in 2018, would have been higher and led to a recovery for Aeolus under the terms of the swap with Credit Suisse.

In his Friday ruling, Hargun determined that no change to NCS’s reporting format had occurred, which now results in NCS’s industry loss estimate for Typhoon Jebi falling below the triggering threshold for the swap, thereby requiring Aeolus to return the remaining $20mn in collateral Credit Suisse had posted on the deal.

“Having regard to the findings made by the Court, the Court concludes that, in the circumstances under consideration NCS, as the Report Publisher, did not cease to provide any loss reports or materially change its methodology,” Hargun explained in the ruling.

“In the circumstances, the Calculation Agent was entitled, in good faith and in a commercially reasonable manner, to take the view that NCS, as the Report Publisher, had not ceased to provide any Loss Reports or materially changed its methodology,” the judgment continued.

“Accordingly the Plaintiff’s [Aelous’] claim for damages and/ or a declaration that the plaintiff is entitled to be paid the sum held in the Trust Accounts in the total sum of $20mn is hereby dismissed,” Hargun continued.

“The Court grants the Defendants [Credit Suisse] the relief sought in the counterclaim, namely a declaration that each of the defendants is entitled to receive from the Plaintiff the collateral which they have deposited in the Trust Account.”

In the judgment, it was revealed that during the trial in March, Aeolus put forward partner and portfolio manager Henry Kingham to give evidence, while Credit Suisse relied on the evidence of insurance linked strategies head Niklaus Hilti as well as Arthur Esteves-Ferreira. 

In addition, former Guy Carpenter ILS expert and current Lloyd’s advisor Des Potter acted as an expert witness for Aelous, while former Perils product head Eduard Held gave expert evidence for Credit Suisse.

According to legal documents seen by The Insurer, Credit Suisse had claimed it was entitled to keep $20mn of the total swap because of the losses caused by Typhoon Jebi in early September 2018.

Aeolus Re had contended that Credit Suisse failed to comply with the terms of the swap agreements, causing the firm to suffer a loss. It alleges that a report publisher would have certified losses caused by Typhoon Jebi were in excess of the trigger amount, meaning it would have been entitled to keep $20mn under the swap confirmations.

Aeolus Re had alleged breach of contract against Credit Suisse, on the basis that it failed to comply with the terms of the swap by failing to appoint a replacement report publisher when the appointed publisher ceased publishing reports and/or materially altered its method of reporting.

Aeolus Re alleged that the Credit Suisse parties’ breach caused Aeolus Re to suffer loss and sought damages of $20mn, the amount that Aeolus Re claimed it would have been entitled to receive from Credit Suisse as a result of Typhoon Jebi.

Meanwhile, Credit Suisse alleged breach of contract against Aeolus Re, on the basis that Aeolus Re failed to return the $20mn when the agreements terminated after the original report publisher failed to certify losses caused by the Typhoon Jebi in excess of the trigger amount. 

The March 2022 trial followed an earlier hearing in front of Justice Hargun which took place last year.

Both Aeolus and Credit Suisse had submitted competing applications related to the contested payments in two separate actions in late 2020. The actions arose out of the same transaction but the parties elected to pursue separate proceedings rather than having their cross-claims determined in one single action.

But in a March 2021 judgment Justice Hargun found that the competing applications should be consolidated into a single set of proceedings.

He ruled that the appropriate solution to the duplicative proceedings would be to have Credit Suisse’s suit against Aeolus Re brought under Aelous Re’s initial suit against Credit Suisse.

Industry data has shown Jebi to have been the costliest typhoon on record to impact Japan, followed by 2019’s typhoons Hagibis (insured losses of $10bn) and Faxai ($7bn).

The case is noteworthy and has been closely watched by industry executives, as it is relatively unusual for ILS contracts to be disputed – although not unheard of. 

In 2018, Securis and Lloyd’s Syndicate 4242 became embroiled in a mediation dispute over a $21.5mn loss following the premature release of 2017 collateral.

In a statement to this publication, Walkers Bermuda partner and co-lead of (re)insurance and ILS Peter Dunlop, who represented Credit Suisse in the case, called the Friday ruling “a welcome clarification” of the law as it relates to the tabulation of industry losses for such ILS contracts.

“This judgment will be of enormous importance to the ILW swaps market in Bermuda and internationally and provides much needed, renewed faith in contract certainty,” Dunlop said in a statement.

“I am extremely proud to have led a fantastic legal team at Walkers (Bermuda) Limited and to have won this hugely significant case for our client, Credit Suisse Insurance Linked Strategies, which remained resilient throughout this entire dispute.”

The Insurer comment

While ILS contract disputes are rare, this case highlights the importance of contract certainty – a lesson that has been learned many times over by the (re)insurance sector…