Net assets rise for City National Rochdale ILS fund, but portfolio doesn’t

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Total net assets appear to have risen at industry loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund the City National Rochdale Select Strategies Fund (CNRLX) in the last quarterly report, but at the same time the value of investments in the portfolio was almost static.

The City National Rochdale Select Strategies Fund, which is an interval structured mutual ILS fund run by Royal Bank of Canada subsidiary City National Rochdale, LLC, reported its total net assets as $34.2 million as of January 31st 2018.

That figure had risen to $44.51 million, as of April 30th 2018, likely helped by inflows from investors sourced through the registered investment advisers the mutual fund manager works with.

But the value of investments in the portfolio hasn’t grown in line with this, as it was reported to be $29.784 million at the end of January, but by the end of April this had only increased to $30.015 million.

Interestingly the cost of those investments was cited as $30.672 million at the end of both reporting periods, so still the fund has not been able to fully recover from mark downs and certain positions, especially wind exposed ILW’s hit by the 2017 hurricanes, remain impaired it seems.

But the gap between net assets and investments in the portfolio is interesting, as it may reflect inflows of capital yet to be deployed, which the manager may now have deployed at the mid-year reinsurance renewals.

Of course the difference could also reflect side pocketing and as industry loss estimates have increased it is possible the CNRLX ILS fund has suffered further from the 2017 catastrophes. But we feel this is less likely, given the static nature of the investments over the period, suggesting that the net asset increase is capital for deployment rather than a sign of loss creep.

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.

As a result, 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.

Growth has been slow so far for the fund, but perhaps at the next quarterly juncture we will see an increase in the value of investments to bring it more into line with the funds net assets.

Also worth noting for the future is that as industry loss estimates have recently increased again for the 2017 hurricanes, there is the chance of further impairment to positions which are still on-risk or impaired by those events. That should become clearer in later reports.

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