Lower Irma estimate helped City National Rochdale ILS fund recover

by Artemis on April 11, 2018

A lower than expected industry loss from hurricane Irma helped the industry loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund, the City National Rochdale Select Strategies Fund (CNRLX), recover much of its wind ILW losses, as positions moved from being considered a loss to untouched.

The 2017 hurricane season caused the City National Rochdale Select Strategies Fund, which is run by Royal Bank of Canada subsidiary City National Rochdale, LLC, to mark down the value of its investments by 22% due to the major hurricanes that hit the United States.

Now, in its latest report, the fund manager reveals that after a fresh estimate was released by PCS in December, with a lower than had been forecast insurance and reinsurance industry loss estimate for hurricane Irma, what had been a roughly 20% mark-down across its wind ILW book actually resulted in a considerably better 2017 full-year return of -3.90%.

City National Rochdale works with specialist ILW and ILS investment manager Cartesian Iris on this strategy, with the Select Strategies Fund allocating its capital to invest in the segregated cells of the Cartesian’s Iris Reinsurance Ltd. vehicle.

The investments are predominantly in ILW’s, an area that Cartesian Iris specialises, which are derivative-like structures that provide reinsurance or retrocessional coverage to a protection buyer, with payouts based on reported levels of industry loss from qualifying catastrophe events.

As a result the exposure to the hurricanes was always going to be a factor and the eventual magnitude of the loss the fund would face would be determined by the size of the loss estimates reported by official agencies, such as PCS.

Before Irma even formed some ILW investment positions of the City National Rochdale Select Strategies Fund had already been marked down due to the impact of hurricane Harvey.

But it was Irma that caused the major impacts, or had been thought to, with the manager explaining, “A full discount was applied to all contracts that were exposed to damage as a result of Hurricane Irma (15 contracts, roughly 20% of the portfolio).”

However, come December and the picture of hurricane Irma losses had changed, with PCS’ estimate coming in lower than the early modelled forecasts had suggested the industry loss from Irma would be.

As a result, the City National Rochdale ILW fund made a significant recovery, as the manager explained, “12 of those 15 impaired contracts were reinstituted – resulting in a rather large “mark-up” and putting in place the Fund’s -3.90% performance for the year.”

In recent weeks the industry loss estimates for hurricane Irma have increased again, which as we understand it has put some more ILW’s in the frame for potential losses, but so far the City National Rochdale Select Strategies Fund has not been marked down again.

In fact, looking at the funds pricing on Bloomberg, there has been little fluctuation since the recovery in December, which suggests that the positions it holds are likely currently still deemed safe from any additional Irma-related attrition. We’re sure the managers will be watching the future estimates closely though, as there is always a chance that the industry impact increases again, especially with so many Irma claims re-opened and issues surrounding assignment of benefits (AOB) in Florida being closely watched.

During the quarter to January 31st 2018, the fund increased its assets slightly, from $23.2 million at October 31st 2017 to a new high of total net assets amounting to just under $34.2 million.

It will be encouraging to the manager that it increased its assets following losses in its first six months of operation and will likely have allowed it to take advantage of market conditions at January 1st reinsurance renewals.

In fact, the manager foresees opportunities to capitalise on the higher rates available in the ILW market, which as these are largely for retrocessional reinsurance is an area where the highest rate increased have been seen.

The manager forecast, “We believe current market activity has created a dynamic set of opportunities for the Fund.”

Saying on the January renewal season, “Reinsurers who paid claims in 2017 aggressively pushed for higher rates and better terms and conditions on their renewing portfolios. Favorable market conditions extended to new and renewal business alike. Loss affected contracts saw significant premium rate increases as counterparties looked to make up for losses incurred in 2017. Similarly, contracts that did not incur losses last year were also bound at higher premium rates, although to a lesser degree.

“We are excited for the potential opportunity to further capitalize on market dynamics in an effort to source attractive opportunities for our shareholders in the coming months.”

Investors may have found the volatile dip and then bounce back surprising, but of course this is the nature of industry loss based reinsurance contracts, that they are subject to both increases and decreases in estimates and until the final determining number comes out they can be expected to be volatile, especially after a hurricane season like 2017’s.

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