City National Rochdale ILW fund grows, sees dynamic & improving returns

City National Rochdale’s industry loss warranty (ILW) focused mutual insurance-linked securities (ILS) investment fund grew during the last quarter and saw “positive opportunities” at the January reinsurance renewals, with an expectation of the ILW market seeing dynamic conditions and improving returns.

The City National Rochdale Select Strategies (CNRLX) is a mutual fund structured in the interval style, with a predominant focus on investments in industry loss warranty (ILW) focused reinsurance and retrocession contracts across global peak peril zones as well as some regional U.S. ILW contracts.

The fund gains access to the ILW market and sources its risk-linked returns through a relationship with asset manager Neuberger Berman’s experienced ILW and index reinsurance investment team, with its assets deployed into cells of the Neuberger Berman ILS team’s NB Re Ltd. vehicle (previously named Iris Re).

The fund had been growing its portfolio of largely ILW investments through the second-half of 2019, ending July 2019 with some $100.3 million of total assets, which six months later by January 31st 2020 had increased by 23% to almost $123.2 million.

Total ILW investments included in the fund were valued at $107.4 million at January 31st, just over $10 million up on the cost of those investments in the portfolio of $97.2 million.

The ILW market, which is a particular specialism of the Neuberger Berman ILS investment team, has been an area of interest in global reinsurance and ILS as capacity had been dented and rates risen significantly, following the consecutive years of major catastrophe losses around the world.

As a result the retrocession market experienced a contraction and a correction of sorts, which has provided attractive opportunities for those able to provide capacity for ILW transactions.

In addition to rising returns, the City National Rochdale fund has also been through the last year with zero fresh losses.

Commenting in its shareholders letter, the company explained, “Strong risk-adjusted pricing in the ILS market allowed returns, for the Fund, to remain relatively high, despite taking on less modeled risk than last year based on underlying risk factors. This conservative approach to portfolio construction proved successful following an active hurricane season.

“Despite the large number of catastrophe events in both the U.S. (tropical cyclones, severe convective storms, wildfires) and Japan (typhoons), the Fund did not experience any losses in the portfolio for the year ended January 31, 2020.”

The fund outperformed the main catastrophe bond index in the fourth-quarter of 2019, which is one of the benchmarks it tracks.

While for the full-year to January 31st 2020 the City National Rochdale Select Strategies (CNRLX) fund recorded a 6.34% return, which is after accounting for “a slight knock on performance due to past storm activities,” again outperforming its benchmarks for the year.

“Current market events have created a dynamic set of opportunities for the Fund. ILS market conditions continue to be very favorable from both a pricing and demand standpoint,” the company said.

Adding that, “Pricing in the ILW market continues to improve, with increasing demand from a wide range of counterparty types given the limited supply of third-party capital in the market.”

The investment adviser further explained how the ILW fund managed to avoid major loss in 2019.

“The driving force of the Fund’s positive performance can be attributed towards its more regionally focused ILW exposure in the United States, as compared to the Index’s more global exposure (which resulted in some cat bond defaults for the Index),” the adviser explained.

“Despite the large number of catastrophe events in both the U.S. (tropical cyclones, severe convective storms, wildfires) and Japan (typhoons), the Fund emerged with the expectation of no losses in 2019 and mostly performed in line with accrual expectations – with some residual mark downs from past storm events.”

The fund is viewed by its advisers as an ILS or reinsurance investment strategy that delivers alpha for its capital providers, unlike the more beta-like returns indicated by catastrophe bond indices.

” In more active year’s, where many loss events take place (such as 2019) – we feel CNRLX should outperform in comparison to the Index,” they explained.

Looking ahead, the advisers are bullish about the prospects for the ILW market in 2020, seeing opportunities for investment that could also enable it to increase its asset base throughout the year.

“In terms of expectations for 2020, due to seemingly very few capacity providers and widespread increase in demand for ILWs, the Fund saw a lot of positive opportunities during the January renewal period and expect more of the same in the upcoming June period,” they explained.