Pioneer ILS Interval fund shrinks further as losses continue to bite

In the last quarter of the record, Amundi Pioneer Investment Management’s dedicated insurance-linked securities (ILS) mutual investment fund strategy shrank further as losses and loss creep continued to dent returns and the value of ILS assets invested in.

Given its broad allocation to reinsurance and retrocession, predominantly through sidecars (65.7%) and private collateralized reinsurance deals (24.6%), as well as some catastrophe bonds (9.7%), the Pioneer ILS Interval Fund had broad exposure to the loss events that struck the market in late 2018.

Having grown its total net assets to $992 million by October 31st 2018, based on ILS investments reported to have cost the asset manager almost $990 million, the fund then shrank in the following quarter resulting in $904 million of net assets as of January 31st 2019, based on assets in the portfolio costing almost $1.004 billion.

The fund has now reported its assets as at April 30th 2019, with the data showing further shrinking of total net assets to $876.3 million, as losses continued to erode certain positions in the portfolio.

The $876.3 million of total net assets is based on ILS, cat bond and reinsurance positions in the portfolio that cost the investment manager almost $938 million.

Encouragingly for the investors in the Pioneer ILS Interval Fund, the gap between the cost of ILS assets invested in and the total net assets of the fund has narrowed, which does suggest that a recovery is underway as certain positions mature and roll out of the portfolio, while fresh investments are added in their stead.

Commenting on the last six months performance, Chin Liu, Managing Director, Director of Insurance-Linked
Securities (ILS) and Quantitative Research at Amundi Pioneer and the portfolio manager of the ILS Interval Fund, said that the wildfires in late 2018 hit the fund particularly hard.

Liu explained that losses pushed the Pioneer ILS Interval Fund return to -7.56% at net asset value over the six-month period ended April 30th 2019.

He continued, “The ILS market experienced meaningful losses in late 2018, losses that weighed on the Fund’s six-month performance. After a relatively quiet first half of 2018 in terms of the frequency and severity of events (both economically as well as insured), the second half was very active. The full calendar year brought approximately $80 billion in insurable losses, which followed $140 billion in 2017 — the second-costliest year for natural disasters on record — marking the first incidence of back-to-back losses since 2004-2005.”

He went on to explain that the California wildfires proved particularly impactful to the ILS market, eating into reinsurance and retrocession layers that had previously been considered to be particularly remote.

He said that the 2018 wildfire events “dwarfed” the 2017 fires in California, resulting in a combined $16.5 billion of industry losses that “hit the reinsurance industry particularly hard.”

The reason it hit the reinsurance sector so hard was that, “Wildfires of such severity were considered, modeled, and priced as either very unlikely or a tail event,” Liu explained.

He said that the industry might model a $3 billion California wildfire industry loss as a 1-in-10 year occurrence, a $4.8 billion loss at about a 1-in-25 year event, and a $10 billion loss as 1-in-100 years.

Hence, the $16.5 billion loss across wildfires is considered a very remote return period risk, which as a result ate into layers of the reinsurance and retrocession market that had been considered safer from losses.

Given the Pioneer ILS Interval Fund’s focus is largely on sidecars, mainly reinsurer operated ones, it’s no surprise that erosion to many positions in the portfolio occurred from these wildfire events.

Liu said, “The 2018 wildfires translated to losses for the Fund in November and December. The reinsurance industry features a variety of risk layers — with different probabilities of attachment — and we generally have focused on the more remote layers in managing the portfolio. Unfortunately, given that the event was the worst in the history of California fires, even the more remote layers felt the effects.”

Encouragingly though, Liu explained that following these losses, “Reinsurers and modelers have responded to back-to-back loss years by adjusting their pricing models to reflect the risks.”

Further impacts were also felt from typhoon Jebi’s loss creep as well, as Liu continued, “The loss creep from Typhoon Jebi had a negative effect on the Fund’s performance during the period, in line with the increased damage forecast by the major global reinsurers.”

In addition, Liu explained that the ILS market was hit by minor losses from catastrophe events including the flooding and hailstorms that hit Australia in late 2018 and early 2019, as well as Winter Storm Eberhard in Europe, and tornadoes in the United States in March.

As a result of these catastrophes and severe weather events, it’s no surprise that the Pioneer ILS Interval Fund was down for the six month period and lost further size in the most recent quarter of record.

The shrinking of net assets appears largely to do with rollover of positions in the fund and erosion due to losses, rather than any sign of significant investor churn or redemptions, which is encouraging for the asset manager.

With the gap between cost and valuation of the ILS assets invested in already narrowing somewhat, it bodes well for the ILS fund returning to growth in quarters to come as the losses of prior years are increasingly dealt with.

Commenting on the outlook for the ILS asset class and the fund under his management, Liu said, “While we were disappointed with the Fund’s negative return over the six-month period, we also recognize the unique risks associated with investing in ILS. However, the nature of the long-term, uncorrelated return stream of ILS reinforces our belief that the asset class can potentially.”

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