Premium income outweighs losses for Pioneer ILS Interval Fund

Asset manager Amundi Pioneer Investment Management’s flagship dedicated insurance-linked securities (ILS) fund, the Pioneer ILS Interval Fund, managed a positive return of over 5% in the year to October 31st 2018, as premium income earned outweighed insured losses for the managers’ ILS portfolio.

The Pioneer ILS Interval Fund invests broadly across the ILS and collateralized reinsurance space, allocating to catastrophe bonds, private ILS deals, quota shares, sidecars and other collateralized reinsurance arrangements.

As a result the fund is broadly exposed to all of the natural catastrophe loss activity experienced over the last two years, but despite the regular occurrence of these losses the manager has achieved impressive performance in the twelve months to October 31st.

For the year to October 31st 2018 the Pioneer ILS Interval Fund returned 5.04% at net asset value, far outperforming its benchmark, the ICE Bank of America Merrill Lynch (ICE BofA ML) 3-month U.S. Treasury Bill Index, which returned only 1.68%.

For comparison, the Eurekahedge ILS Advisers Index which tracks the performance of multiple ILS funds only returned 1.68% over the same twelve month period.

During the last three months of the period the Pioneer ILS Interval Fund only grew very slightly, reaching almost $992 million of assets under management.

Portfolio Manager for the ILS Interval Fund and Director of Insurance-Linked Securities (ILS) and Quantitative Research at Amundi Pioneer Chin Liu explained the performance of ILS over the period.

“Several major natural disasters occurred over the past 12 months, but the ILS market nonetheless finished with a positive return, as premium income outweighed the impact of insured losses,” he explained.

He noted the loss creep experienced through 2018, saying that, “ILS came under pressure from losses incurred throughout 2017” during the twelve month period.

The first six months of 2018 saw a relatively quiet time for the ILS market, with few major loss events and positive performance from the majority of ILS assets as a result.

But, “Natural disasters again began to affect ILS performance in the late summer and into the autumn,” Liu continued.

Key events that did cause some negative impacts during the last few months of the period under report included hurricane Florence which had a limited effect on ILS, hurricane Michael which had a modest effect on the ILS market, Typhoon Jebi which affected the ILS market on a stand-alone basis, and the aggregation of Japanese typhoon losses which brought further losses through aggregate reinsurance and ILS instruments.

However, these loss events were not enough to drive the performance of the Pioneer ILS fund into negative territory.

Liu noted, “The broader ILS market nevertheless finished in positive territory on the strength of earlier gains, which offset some of the losses the market experienced in the prior 12-month period.”

Liu said that the Amundi Pioneer investment approach helped in its performance over the period, as the manager does not allocate to every ILS issuance, being selective and only choosing those it believes will perform over the duration of the transaction.

In addition, Liu said that Amundi Pioneer has purposefully sought to avoid allocating too much capital to first-layer ILS instruments, which has helped it to avoid significant impacts from any single event during the period.

The selective nature of the allocation process at Pioneer is notable in the fact the fund only grew very slightly in the quarter to October 31st, having reached total net assets of almost $983 million at the end of July 2018, but finished October 2018 with just under $992 million of total net assets in the ILS fund portfolio.

The majority is allocated to reinsurance sidecar vehicle investments which includes privately arranged quota shares, with 62.4% of the total assets dedicated to this area of the ILS asset class.

26.5% is allocated to other collateralized reinsurance instruments, 10.6% to catastrophe bond investments and the remaining 0.5% to industry loss warranties (ILW’s).

However, the growth of the Pioneer ILS Interval Fund strategy over the twelve months is very impressive, having increased from $359 million at the end of October 2017 to the almost $992 million just one year later.

Of course, with the annual report being to October 31st 2018 it does not include any impacts from the recent California wildfires. It will be interesting to see how that event affects the fund at the next quarterly reporting period.