ILW fund’s defensive positioning for 2022 hurricane season paid off: CNR CEO

Adopting a defensive position, with respect to the 2022 hurricane season, has paid off for an industry loss warranty (ILW) focused investment strategy, according to the CEO of the City National Rochdale Select Strategies Fund.

The industry-loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund strategy offered by investment adviser City National Rochdale (CNR) delivered a positive net return of 0.98% for the year to January 31st 2023.

CEO Garrett R. D’Alessandro explained that the defensive position adopted for what was expected to be a busy 2022 hurricane season was “the result of our analysis of environmental risk conditions and inflationary factors in a post-COVID economy.”

“Due to the Fund’s more targeted industry loss warranty (“ILW”) alpha approach and defensive positioning, it outperformed the beta-oriented SwissRe Cat Bond Index (-0.65%), which was impacted by more global activity for the year ended January 31, 2023,” D’Alessandro explained.

He further stated that, “The Fund’s 2022 portfolio was defensively positioned in anticipation of an active 2022 Atlantic hurricane season as well as to mitigate against adverse impacts from persistently high inflation and continued concerns surrounding the potential for post-event loss amplification from supply-chain disruptions.

“With these concerns in mind, the portfolio was built with higher attachment points (i.e., higher levels of industry loss that would need to be breached in order to trigger a loss in a contract), wider exclusions of non-peak secondary perils (such as tornadoes, winter storms, and wildfires), and increased regional diversification through county- and state-weighted positions, which continue to become a larger share of the portfolio as demand from insurers and reinsurers for these products has steadily increased.”

He also added that, “We believe the incorporation of real-time environmental and financial risk considerations can have a meaningful positive influence on longer-term results and that our active management was an important driver of performance in 2022.”

Recall that, the City National Rochdale Select Strategies fund acts as a feeder to Neuberger Berman’s ILS strategy, providing that asset manager with a diversified source of capital, and CNR with a strategy to offer to its investors that is managed by a leader in the ILW investing space.

The investment adviser, the Neuberger Berman ILS team, commented on the CNR fund’s report, “The Fund’s outperformance is in concurrence with management’s view that the Fund is more of an “alpha” play, with limited geographic exposure and triggers, compared to the SwissRe Cat Bond Index, which has global exposure and is considered a “beta” play. In more active years such as 2022, in which many loss events occur, we believe the Fund should outperform in comparison to the SwissRe Cat Bond Index.”

Looking ahead, the investment adviser said, “In terms of expectations for 2023, ILS market conditions continue to be favorable from a price and demand standpoint as Hurricane Ian’s impact, combined with the attractive pre-Ian market, with prior loss events and increased protection demand causing property catastrophe premiums to steadily increase over the last few years, has led to a historic market environment characterized by substantial prices increases. Pricing in the ILW market has steadily improved going into 2023, with expectations for further price increases in the upcoming spring renewal season.”

D’Alessandro concurred, saying, “The Fund’s portfolio construction process for 2023 is now well underway, and we are focused on diversification and capital-efficient opportunities in the ILW and catastrophe bond markets, where we believe risk-adjusted returns are most attractive.”

The total net assets of the City National Rochdale Select Strategies (CNRLX) fund ended January 2023 at $197.2 million, which is down slightly from the $202.4 million that had been reported six months earlier.

Investment positions were valued at over $186.9 million, against a cost of almost $150.6 million at the end of January.

View our chart of industry-loss warranty (ILW) price trends here.