Pioneer ILS Interval Fund hits $75.4m, returns 5.9% despite claims

by Artemis on January 6, 2016

Pioneer Investments continued to grow its interval style insurance-linked securities and reinsurance linked investment fund, the Pioneer ILS Interval Fund, through 2015, reporting net assets had increased by another 17% to $75.4 million at the end of October.

Pioneer Investments, the U.S. mutual fund manager with around $244 billion of assets under management globally and $69.3 billion in the U.S., launched its Interval ILS fund in late 2014, as its first dedicated ILS and reinsurance linked investment fund. Pioneer also invests in ILS and reinsurance within other multi-asset class mutual funds.

Since launching the ILS Interval fund Pioneer has steadily grown its assets under management. At the end of April 2015 Pioneer reported $54.66m of assets managed in the ILS Interval fund, which subsequently grew by 18% to $64.4m by the end of July 2015.

Now, having just released its annual report for the fund, Pioneer Investments reports further growth, with total net assets of the ILS Interval fund increasing by another 17% to $75.4m by 31st October 2015.

The increase in assets is largely due to new capital inflows into Pioneer’s ILS Interval fund, resulting in the managers of the fund being able to make a number of new investment allocations, taking on new positions in the quarter.

New positions in catastrophe bonds, private ILS deals, collateralised reinsurance quota shares and sidecars are all evident in the report. In the quarter it looks like the managers of the Pioneer ILS Interval fund took positions in insurer ACE’s syndicated collateralised reinsurance deal (possibly this one) and a position in Chubb’s East Lane Re VI Ltd. (Series 2015-1), as well as some shifting around of allocations to other deals.

Allocations to securities by the fund, which invests in a mix of reinsurance sidecar notes, other collateralized reinsurance or private ILS quota share notes, and catastrophe bonds, reached $73.34m at 31st October, up 16.5% on the end of July.

Top holdings for the Pioneer ILS Interval fund continue to be a Kane segregated account named Gullane, a private collateralised ILS deal of some description, as well as insurer Brit’s Versutus sidecar, Munich Re’s Eden Re II sidecar, Swiss Re’s Sector Re V sidecar, PartnerRe’s Lorenz Re SPI, Aspen’s Silverton Re sidecar, TransRe’s Pangaea Re vehicle and another Kane segregated account named Exeter.

With such broad exposure to the global reinsurance market through the major sidecar investments that Pioneer has made in its Interval fund, you’d naturally expect the fund to have seen a number of claims and losses through the year on some of its positions.

Despite that and perhaps demonstrating just how robust a diversified portfolio of ILS and reinsurance linked investment can be, Pioneer has reported a return of 5.9% at net asset value from its inception date on 22nd December 2014, through to the end of the reported period on 31st October 2015.

Over the same period the Interval ILS funds benchmark, the Bank of America Merrill Lynch (BofA ML) 3-Month U.S. Treasury Bill Index, returned just 0.01%, which clearly demonstrates the benefit that an allocation to ILS can offer to investors.

Even more impressively, over the full-year of 2015 the return of the ILS Interval Fund was 9.93%, a very attractive return in the current reinsurance and ILS market climate.

The portfolio managers for the Pioneer ILS Interval Fund, Charles Melchreit and Chin Liu, explained the performance over the period under review:

Given the increased volatility that plagued the capital markets for a good portion of the 12-month period, the Fund’s performance benefited from the fact that insurance-linked securities have such low correlation with the more traditional asset classes. In addition, the period featured a relatively benign claims experience for casualty insurers and reinsurers, which was another positive factor in the Fund’s solid performance. The U.S. hurricane season, for example, was relatively quiet, while windstorms in Europe did not generate significant insurance losses. As a consequence, casualty insurers experienced relatively few notable claims, and the Fund’s insurance-linked investment selections produced positive returns.

Even more impressive is the fact that the fund was hit by a number of major catastrophe and specialty risk loss events during the period, reflecting the broad exposure to global events that sidecar investments can bring. However, by diversifying those investments and given the levels where sidecar losses typically attach, impacts can be minimal except for in the case of very large industry loss events.

The portfolio managers continued:

To be sure, there were some claims during the period that had modest effects on the Fund’s investments. They included damages incurred from winter storms in the Northeast U.S.; from Cyclone Marcia on the Australian coast; from winter storms in Germany and Austria; and from an oil-drilling platform accident in the Gulf of Mexico. Also affecting the Fund, somewhat, were Hurricane Patricia’s landfall on the west coast of Mexico and an explosion at a port warehouse in China. Overall, however, the insurance-linked products in which we invested generated good performance for the Fund during the period.

With that in mind it is safe to assume that the majority of diversified ILS portfolios or funds being managed in the space will have had some exposure to these events as well, given many of the private ILS quota shares, sidecars and other deals have broad, global exposure to reinsurance events.

The portfolio managers explained that in order to minimise the impact from any single loss event they “strive to reduce the Fund’s risks by diversifying the types of hazards and geographical exposures of the investments held in the portfolio.”

That is clearly working for the ILS Interval Fund to be able to return 5.9% over a roughly 10 month period, even while suffering a number of claims from the events detailed above and to achieve the 9.93% across full-year 2015.

Looking ahead, the portfolio managers acknowledge that further rate declines were possible, but that a pricing floor appears to be within reach.

We expect that pricing of insurance-related investment products – or the potential premiums to be paid by property insurers – may decline slightly as policies are renewed. This potential change is caused by both new infusions of capital into the market and the recent benign claims experience of the industry. However, we believe a bottoming of rate-on-line is close, based on market intelligence. In general, we think the most recent pricing trend is the result of more capital-use discipline exhibited by the reinsurance industry.

Pioneer continues to find steady growth opportunities for its interval ILS fund and the performance figure is right in the range that global investors are looking for, in an asset class displaying low correlation to other financial indicators.

Pioneer Investments manages over $1.6 billion in ILS and reinsurance linked assets across a range of multi-asset strategy funds that allocate a portion of their assets to re/insurance-linked investments and the Interval ILS fund. As new opportunities to deploy capital at attractive returns emerge Pioneer is likely to find it can increase its ILS asset further.

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