Rochdale ILW fund puts capital to work, grows, but Irma dents returns

Industry loss warranty (ILW) focused mutual insurance-linked securities (ILS) investment fund City National Rochdale Select Strategies (CNRLX), grew its net assets by 13% in the quarter to July 31st, but also saw fresh losses on two positions as hurricane Irma continued to develop.

The City National Rochdale Select Strategies Fund is a largely industry loss warranty (ILW) focused reinsurance and retrocession investment strategy focused on global peak peril zone and regional U.S. ILW contract investments.

It accesses this broad exposure through its relationship with the experienced ILW and index reinsurance investment team of asset manager Neuberger Berman, investing its assets in the cells of the Neuberger Berman ILS team’s NB Re Ltd. vehicle (previously named Iris Re) in order to source its risk-linked returns.

Over the course of this year, the City National Rochdale mutual ILS fund has gradually recovered from some prior year loss impacts and steadily added to its overall net assets.

The fund had added almost 11% to reach invested assets of $52.7 million in its portfolio and total net assets of $62.4 million, as of January 31st 2019 this year and then the ILW focused investment fund managed to add almost 10% to reach a portfolio valued at $57.8 million with an impressive 42% in overall net assets to $88.7 million as of April 30th 2019, as its cash on hand grew as well.

Fast forward a quarter to the end of July and it seems the investment team have been busy allocating that cash on hand to renewals deals around the June and July reinsurance contract signings.

At this time ILW rates had risen quite significantly, making new investments made much more attractive than say a year earlier, which will have helped the NB Re team to create a more profitable portfolio, on a forward-looking basis.

At July 31st the portfolio of largely ILW investments had grown to almost $88.4 million in size, while at the same time the overall net assets had increased 13% to almost $100.26 million.

It’s impressive growth over the year so far and also impressive to see that cash on hand remains sufficient to take advantage of any opportunities that emerge during the wind season, or towards the end of the year renewals.

While investing conditions had clearly improved, resulting in the deployment of excess capital into fresh ILW transactions and also the accumulation of more capital for future deployment, the impacts of 2017’s hurricane Irma continued to be felt in the quarter to July 31st.

In its letter to shareholders, the investment manager said that updates to industry loss estimates for the hurricane resulted in further losses from the storm.

“These revisions unfortunately resulted in adjustments to several positions, in particular due to Irma exceeding the $20 billion threshold. This led to the full impairment of 2 contracts, resulting in a slight mark down of the Fund in June,” they explained.

Loss development continues for this hurricane and as a result further impacts cannot be ruled out yet. However, the further out we get from hurricane Irma the slower the loss creep becomes and this will eventually see the industry loss estimate finalised, giving certainty to those still holding potentially exposed positions, such as the City National Rochdale fund.

“For the six-month period of February 1, 2019 to July 31, 2019, the Fund returned +0.29%,” the investment manage said, which was “mostly in line with accrual expectations.”

That saw the ILW focused fund beat the benchmark of the catastrophe bond market index, on which the managers said, “The Fund’s outperformance is in concurrence with management’s view that the Fund is more of an “alpha” play (with limited geographic exposures/triggers) in the space in comparison to the index’s worldwide exposure (which represents a “beta” play). In more active years, when many loss events take place (such as 2018) – we feel the Fund should outperform in comparison to the index.”

Of course, it’s important to note that some ILW’s have much higher returns than a considerable percentage of the cat bond index of the market and an ILW strategy is generally expected to have higher return potential than a beta cat bond strategy as a result.

The manager expects to see good market conditions for renewals, given the dynamics that led to rising ILW prices over the last year.

“The current market has created an attractive set of opportunities for the Fund. The limited supply of third-party capital (due to losses from 2017-2018) combined with heightened demand from a wide range of counterparties has led to widespread increases in Industry Loss Warranties (“ILW”) pricing. With that said, the Fund’s position in the private ILW market has allowed for increased pricing in contract negotiations,” they explained.

That suggests the fund should have no problem deploying its excess capital towards the end of the year reinsurance renewals and may also find it an attractive time to increase its net assets by raising more capital, allowing for a deployment of more funds into the NB Re ILW exposed investment cells at that time.

The manager closed its semi-annual report saying, “In summary, we believe opportunities within the ILW market remain dynamic and attractive. Market conditions (in both reinsurance and traditional) help enable CNR to justify our confidence in the strategy and emphasize the importance of implementing non-correlated return solutions to a traditional investor’s portfolio.”