ILW customisability key to fund positioning, but demand declines slightly: CNR CEO

The ability to customise industry-loss warranties (ILW’s) is seen as a key trait in the reinsurance-linked asset that assists in the portfolio construction process, but demand for ILW protection has fallen slightly among reinsurers, according to the CEO of the City National Rochdale Select Strategies Fund.

The slight decline in demand for industry-loss warranty (ILW) protection is likely a response to the much higher cost of coverage in the hardened reinsurance market.

Artemis’ index of ILW pricing shows how significant the price increase in ILW’s has been over recent years and despite having declined somewhat and plateaued since this year, the higher cost of retrocessional reinsurance capital has seen some buyers pulling-back somewhat from the ILW market.

Investment adviser City National Rochdale (CNR) offers an industry-loss warranty (ILW) focused mutual insurance-linked securities (ILS) fund strategy, that is portfolio managed by the ILS investment team at Neuberger Berman.

Garrett R. D’Alessandro, the CEO of CNR, highlighted the performance of the ILW-focused investment fund to the end of July 2023, with a return of +2.74% for the six months ended July 31st achieved.

While this was some way behind the catastrophe bond market’s total return of over 10% for the same period, ILW’s are of course a more seasonal ILS product and so the ILW fund should benefit from wind season premium accumulation.

In ILW market activity terms, D’Alessandro explained that “pricing remains significantly above 2022 levels, despite a slight decrease in industry loss warranty (“ILW”) demand from reinsurance companies.”

While insured losses had been relatively high in the first-half, largely due to the US severe convective storm (SCS) activity and wildfires in Canada, the hurricane season will not have troubled the ILW fund, meaning acruel of returns through the last few weeks should boost its performance.

The CNR ILW fund has been defensively positioned for wind season, not least due to the forecasts having suggested an above average year of activity.

This is where the customisability of the ILS comes in, with the investment adviser stating, “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.”

Adding that, “The defensive positioning of the portfolio was achieved by increasing attachment levels, purchasing protection (i.e., hedging positions), and refining coverage terms.

“In addition to thoughtfully building the Fund’s portfolio, we believe active management is a key component to our strategy and that incorporation of real-time environmental risk considerations, with the ability to tilt the Fund’s portfolio accordingly, can have a meaningful positive influence on longer-term results.”

In terms of ILW investment positions and assets under management, the CNR ILW fund counted investments valued at $198.6 million at July 31st, up 5% in the quarter, with the cost of these investments pegged at $155.5 million.

Total net assets for the ILW fund are reported to have reached $209.5 million at July 31st 2023, up slightly from the end of April figure of $208 million, but it’s clear from the data and the 5% increase in investment position valuations that a little more capital was likely deployed at the mid-year renewals.

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