City National Rochdale ILW fund beats cat bond benchmark

The industry-loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund strategy offered by investment adviser City National Rochdale (CNR) delivered a 5.95% annual return to January 31st 2022, beating its main catastrophe bond benchmark.

The positive net return of 5.95% for the year to January 31st 2022 was a little lower than the prior year, when the City National Rochdale Select Strategies (CNRLX) fund delivered a positive 6.42% net return to investors in the strategy.

The City National Rochdale Select Strategies (CNRLX) fund is an interval style mutual fund that trades on an exchange and is largely invested in industry-loss warranties (ILW’s), but also holds some catastrophe bond positions as well.

The City National Rochdale Select Strategies Fund had grown to reach $191 million of net assets under management in the strategy by October 31st 2021.

As of January 31st 2022, the ILW focused investment fund had grown again, reaching almost $197.6 million of net assets, its largest ever end of quarter mark.

This fund has a focus on investing across industry loss warranty (ILW) reinsurance and retrocession contracts, featuring global peak peril zones, and also regional U.S. ILW contracts as well, on top of some investments in certain industry loss based catastrophe bonds.

The investments made by the fund are allocated to segregated accounts of the NB Re Ltd. reinsurance underwriting and transformer vehicle (previously named Iris Re), which is operated by and portfolio managed by the Neuberger Berman ILS team.

So the City National Rochdale Select Strategies fund acts as a feeder to Neuberger Berman’s broader ILS strategies, both providing that manager with a diversified source of assets and CNR with a strategy to offer to its investors that is managed by a leaders in the ILW investing space.

In reporting its annual results for this fund strategy, Garrett R. D’Alessandro, President and Chief Executive Officer of the fund explained, “Due to the Fund’s more targeted industry loss warranty (“ILW”) alpha approach and defensive positioning, it outperformed the beta oriented SwissRe Cat Bond Index (+4.64%), which was impacted by more global activity for the year ended January 31, 2022.”

The portfolio management team at Neuberger Berman had positioned the ILW investment strategies it operates in successfully to avoid some of the impacts more broadly felt by Gulf coast windstorms in 2021, it seems.

D’Alessandro said, “A key driver of positive performance in 2021 was the Fund’s defensive positioning in anticipation of elevated hurricane activity and concern surrounding the increased potential for post-event loss amplification. This defensive positioning was achieved by increasing attachment levels (i.e., levels of industry loss that would need to be breached in order to trigger a loss in a contract), shifting away from the frequency and aggregate type structures (i.e., those contracts that are tied to a second and third event), narrowing peril exposure away from non-peak secondary perils (such as tornadoes, winter storms, and wildfires), and purchasing protection at lower attachment levels.”

Adding, “This defensive approach is contrary to conventional reinsurance wisdom whereby market participants often focus on gross written premium increases and increasing exposure (or market share) in a rising interest rate environment. We, however, believe it is prudent to first start with risk considerations and then optimize on structure and price through negotiation.”

He continued to explain that pricing in the ILW market has steadily improved going into 2022, alongside more favourable insurance-linked securities (ILS) market conditions.

D’Alessandro explained that there are, “expectations for further price increases in the upcoming April and June renewal seasons,” in industry loss warranties.

“The Fund’s 2022 portfolio construction process continues, and we are focused on diversification and capital-efficient opportunities in the ILW and catastrophe bond (“Cat Bond”) markets, where we believe risk-adjusted returns are most attractive,” he explained.

Adding that, “We are excited for the opportunity to further capitalize and source attractive opportunities for our shareholders in the coming months.”

The experience of the CNRLX mutual ILS investment fund is another demonstration that attractive returns can still be generated by peak peril focused strategies even in years where major hurricanes like Ida strike.