Following the impact of the major catastrophe losses of 2017 the Pioneer ILS Interval Fund, a U.S. mutual fund insurance-linked securities and reinsurance linked investment strategy operated by asset manager Amundi Pioneer Investment Management, saw its assets under management shrink due to losses affecting numerous positions in the portfolio.
This interval style ILS and reinsurance-linked investment fund had been experiencing steady growth in recent years, as mutual and investment fund manager Amundi Pioneer Investment Management attracted more of its investor clients to allocate to the strategy.
Having reached a new high after growing its ILS and reinsurance assets by almost 28% in one-quarter to reach $390 million by the end of July 2017, the Pioneer ILS Interval fund has now shrunk by approximately 8% to just over $359 million at the end of October 2017.
The reason for the drop in assets under management is the impact of losses and mark-to-market pricing changes in catastrophe bonds and private ILS or reinsurance assets within the fund’s portfolio.
The impacts of major catastrophic events including hurricanes Harvey, Irma and Maria, as well as the Mexican earthquakes and ongoing Californian wildfires, took their toll on the ILS market, with Pioneer’s portfolio being hit across many exposed positions.
Portfolio managers Charles Melchreit, Deputy Head of Fixed Income, Director of Multisector Fixed Income, and a senior vice president, and Chin Liu, Director of Insurance-Linked Securities (ILS), and a vice president, explained that the Pioneer ILS Interval fund fell to a negative return for the twelve-months to October 31st, returning -4.95% as the catastrophe losses impacted the ILS fund’s portfolio.
The pair explained that the catastrophe losses in 2017 “brought a wave of claims against the global property insurance and reinsurance industry” meaning that claims against catastrophe bonds and other ILS positions “rose to the highest level in 12 years.”
As a result the Pioneer ILS Interval fund suffered losses against many private ILS and collateralised reinsurance positions, as well as mark-to-market losses across many catastrophe bond investments.
It’s important to remember that the reported figures are at October 31st 2017, which means some recovery in mark-to-market pricing will likely have been experienced in the last two months of the year. As a result, some price recovery is to be expected by the next reporting juncture.
The portfolio managers commented, “The Fund’s exposure to the claims-triggering events detracted from its performance during the period. In particular, one portfolio holding of a quota-share investment of one large global reinsurer lost 25% of its value in the wake of the multiple natural disasters.”
We presume that this could be an investment in one of the 2017 tranches of the Pangaea Re reinsurance sidecar, sponsored by TransRe, as one position in a 2017-3 tranche from Pangaea Re has a value 25% below the acquisition cost of the notes.
Another 2017-1 tranche from the Pangaea Re sidecar has also seen its value drop by 16%, again likely reflecting losses suffered by its sponsor TransRe.
Looking through the portfolio positions reported at October 31st, it’s also possible to see reductions in value in other reinsurance sidecars, private ILS deals or quota shares and also the mark-to-market losses in certain catastrophe bonds.
The portfolio managers explained that the ILS fund’s broad diversification helped it to avoid heavier losses.
“While the unusually high level of claims drove the Fund’s disappointing, negative return for the 12-month period, we believe our strategies of attempting to keep the portfolio well diversified across different regions and perils, focusing on sponsor quality and deal structure, and seeking to avoid the riskiest parts of the ILS market, helped to limit the damage to the Fund’s performance,” they said.
The portfolio managers Melchreit and Liu noted that, while major, the recent catastrophe losses “have not been severe enough to diminish significantly the capital bases of very large reinsurance companies.”
But they did see a brighter outlook for ILS at the renewals, with a chance of some “repricing of ILS securities” which they said could result in “a firming of prices that may offer favorable opportunities for ILS investors.”
The portfolio managers said that they hope, “That pricing throughout the ILS market should be better, in fact, with some segments improving significantly.”
The reinsurance renewals have shown that rates indeed rose, but not as significantly as many anticipated, as capital and ILS curtailed the rate rises reinsurers had been hoping for.
The investment managers will be hoping for a loss free period that allows the fund to recoup lost ground, as well as a little better returns going forwards as no doubt the renewal positions the Pioneer ILS Interval fund has allocated to at January 1st will command a slightly higher rate-on-line for the investors.
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