Industry loss warranty (ILW) pricing surged through the first-half of 2022, thanks to rising demand for ILW protection amid a constrained market for reinsurance and retrocession capacity, according to the CEO of the City National Rochdale Select Strategies Fund.
Garrett R. D’Alessandro explained that the industry-loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund strategy offered by investment adviser City National Rochdale (CNR), outperformed its benchmarks through the six month period to July 31st 2022.
The ILW fund returned +0.57% for the period, outperforming the ICE BofAML 3-month Treasury Bill Index +0.20% and the Swiss Re Cat Bond Index return of +0.16%.
On ILW market conditions, D’Alessandro said, “Pricing in the segment continued to surge in the second quarter as a result of added demand from protection buyers and the lack of available capacity from sellers.”
You can visualise ILW price increases that have taken place this year over at our chart displaying industry-loss warranty (ILW) pricing trends.
Also explaining that demand was stimulated by a wide range of factors, as, “Rating agency pressure, coupled with balance sheet weakness, furthered the demand for protection.”
“The second quarter was an exceptionally busy underwriting period,” he continued. “ILW pricing increased 10-20% above the first quarter’s observed pricing levels, on average, and pricing increased even more significantly year-on-year.”
Because of the forecasts for an active hurricane season in 2022, the CNR ILW fund took “a more defensive approach in the Fund’s portfolio construction process.”
This defensive positioning was achieved with a focus on writing ILW’s at higher attachment levels, hedging its positions and refining the terms of coverage offered, D’Alessandro explained.
Investment adviser City National Rochdale went into more detail, saying, “We believe the 2022 portfolio is one of the most defensive portfolios that we have ever built.”
They highlighted the importance of active management of a portfolio of ILW’s and other industry-loss based catastrophe bonds, which the fund also invests in.
Also explaining that, “Another defensive measure undertaken has been to move away from frequency triggers in favor of ILWs with higher attachment levels in anticipation of another active hurricane season.”
Finally, they said, “Once again, the customizability of ILWs has given us greater control to modify the portfolio’s risk each season and focus on improving contract terms that protect the portfolio from the potential of poorly modeled or unmodeled risks.”
The total net assets of the City National Rochdale Select Strategies (CNRLX) fund rose slightly to almost $202.4 million, its largest ever end of quarter size.
Investment positions were valued at over $188.77 million, against a cost of almost $153.4 million by the end of July.
As a reminder, the City National Rochdale Select Strategies fund acts as a feeder to Neuberger Berman’s broader ILS strategies, providing that manager with a diversified source of assets and CNR with a strategy to offer to its investors that is managed by a leader in the ILW investing space.
We’re already told that ILW price indications are rising in the wake of hurricane Ian and that buyers of ILW protection should expect additional rate-on-line increases at the year-end renewals.
The availability of ILW capacity is also going to be a little less certain that even a year ago, which should stimulate further upwards pressure on ILW rates and pricing in 2023.