City National Rochdale ILW fund hits $179m, shares trade higher post-Ida

The industry-loss warranty (ILW) focused mutual fund strategy offered by investment adviser City National Rochdale (CNR) increased its net assets during the last quarter of record and the share price of the exchange traded fund (ETF) has been rising over recent weeks.

The fund, which is largely invested in industry-loss warranties (ILW’s) and also holds some catastrophe bond positions, grew its overall net assets by around 6% during the quarter to July 31st 2021, reaching just over $179 million.

But its share price performance over recent weeks is a point of differentiation, as the price has risen and seemingly not experienced any significant negative movements even after recent major catastrophe loss events, although it did dip very slightly right after hurricane Ida struck but then recovered very strongly.

The City National Rochdale Select Strategies (CNRLX) fund is an interval style mutual fund that trades on an exchange.

It has a focus on investing in industry loss warranty (ILW) reinsurance and retrocession contracts across global peak peril zones and also regional U.S. ILW contracts. In addition, the fund does also hold some investments in certain 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.

The CNR mutual ILS fund accesses the returns of the reinsurance and retro market through ILW’s therefore and sources its risk-linked investments through its relationship with asset manager Neuberger Berman’s experienced ILW and index trigger focused reinsurance investment team.

In one year, the CNR ILW focused investment fund has now grown its total net assets by over 36%.

At the time the fund had net assets of $131 million and the investment manager cited a significant opportunity for growth in the firming reinsurance market environment.

Now, at just over $179 million in size, based on total net assets, the ILW focused investment strategy has reached a new record size and is positioned to grow again, we’d imagine, given the reinsurance renewal period will offer new investment opportunities.

The ILW market has benefited from rising reinsurance rates and offers some insulation against the more attritional losses that have hit some ILS investment funds of late, given its named peak peril and industry loss trigger focus as a structure.

Now back to the share price.

As hurricane Ida struck at the start of September, the City National Rochdale Select Strategies fund saw its share price plateau for a fortnight or so, but then jumped higher soon after and has kept climbing since.

Since the start of September, when Ida was strengthening and approaching Louisiana, the ILW focused fund has seen its share price rise by roughly 3.6% and didn’t lose any ground, even given uncertainty that must have been evident over the potential for any hurricane Ida losses to positions it had invested in.

We can only speculate here, but it does seem that the fund may have avoided any exposure to Ida, with Gulf Coast ILW triggers typically set at higher industry loss levels and cat bonds largely avoiding significant impact.

The fund returned +0.52% for the six months ended July 31st 2021 and it seems the return will have been improved thanks to performance since then and following hurricane Ida.

The fund saw higher demand for occurrence trigger ILW’s, larger limit sizes and more customised structures for reducing basis risk over the months to July 31st, which it said had helped its risk profile and portfolio composition.

In addition, the fund saw attractively priced opportunities as some other sources of capacity for ILW’s dwindled,  and protection buyers needed to hedge as peak hurricane season approached.

The investment adviser said that “the 2021 portfolio is one of the most defensive portfolios that we have ever built” through derisiking and raised attachment levels in advance of the peak wind season this year.

They also moved away from frequency triggers and focused on occurrence, to help avoid too many impacts in what was expected to be another busy hurricane season.

All of which suggests that the portfolio construction work undertaken may have been a key reason for the share price strength post-hurricane Ida. It will be interesting to see how the net assets look at the next reporting juncture.