The impacts and losses to insurance-linked securities (ILS) strategies from hurricane Ian this year were a “setback” for performance, but also another chance to reflect and double-down on portfolio management processes, according to Amundi US’ Chin Liu.
Writing in the annual report for the dedicated mutual ILS investment fund operated by Amundi US Investment Management, the Pioneer ILS Interval Fund, Director of Insurance-linked Securities at the firm, Chin Liu, explained how portfolio management responds to events like this, as well as his outlook for the future.
Amundi US’ Chin Liu will be joining us as a speaking participant at our ILS NYC 2023 conference on February 10th in New York. Register today to attend.
In its latest full year to October 31st 2022, the Amundi US managed interval-style ILS mutual fund fell to a -1.97% return for the annual period, with hurricane Ian the main driver.
Given the Pioneer ILS Interval Fund has investments across numerous reinsurance sidecars, private quota share deals, collateralized reinsurance and catastrophe bonds, the strategy was always going to take a hit from a major hurricane loss event like Ian.
At October 31st, the Pioneer ILS Interval Fund’s total net assets were reported as $806.5 million, which is a decline from the $861.5 million reported a quarter earlier, at July 31st.
“While the effects of Hurricane Ian were a setback for the Fund’s performance, the Fund’s return still compared favorably with the performance of most other fixed-income asset classes over the full 12-month period,” Liu explained.
Continuing by saying that, “While having exposure to Hurricane Ian detracted from the Fund’s performance during the 12-month period, each time such an event occurs, we view it as an opportunity to reflect on our portfolio management philosophy and investment process.”
He went on to explain some of the portfolio management steps taken, in response to catastrophe loss activity in recent years, a process that continues after hurricane Ian.
“First, we believe our approach of being sponsor- and vehicle-agnostic – meaning that there are no direct affiliations or ownership conditions in place with a reinsurer – has continued to serve the Fund’s shareholders well. Additionally, some ILS vehicles, like catastrophe (CAT) bonds, have tended to have greater concentration in states like Florida. We therefore have continued to look for what we believe are the best relative values between all ILS vehicle types, while seeking to maintain peril and geographic diversification within the portfolio,” Liu said.
“Second, we have tried to avoid involving the portfolio in aggregate transactions (in other words, transactions that can be triggered by both severity of a single loss as well as frequency of multiple losses). In recent years, the industry has observed an increase in frequency of events, but not severity. Aggregate transactions have tended to pick up losses from both frequency and severity, whereas catastrophe models generally have demonstrated better accuracy with regard to evaluating severity. In addition, wind events have typically been very well modeled. Over the years, agencies have been able to refine and enhance the modeling for such events and their potential outcomes. As a result, the ability of investors to evaluate, analyze, and price the risks involved has improved. This development has continued to reinforce our view that it is preferable to avoid perils, such as cyber-related perils, and some others, where the modeling, data, governance, and legal frameworks have not been as robust as we would like,” he further stated.
Going on to explain that diversification within type of ILS instrument, or transaction, is also important.
“We do not believe pricing improvement will present itself uniformly across all types of ILS issues: CAT bonds, collateralized reinsurance, quota shares, and industry loss warranties (reinsurance products where payouts are triggered by catastrophic insured industry loss). We believe our vehicle-agnostic investment philosophy has allowed us to take advantage of pricing dislocations among different ILS formats. As always, we have continued to shift the Fund’s allocations across various ILS formats in an attempt to capture what we believe are the best relative values. We believe this is a more prudent approach than chasing the highest premiums/returns, or overweighting the portfolio to specific perils or regions,” Liu explained.
Liu further highlighted the importance of due diligence and evaluating every investment, as well as avoiding holding significant exposure to any single large ceding company.
Liu then explained the supply-demand imbalance and in an outlook to the end of year renewals said that the power in reinsurance now sits with those with more stable capacity, that can provide continuity to their counterparties.
“We will look to capitalize on this unique opportunity as we head into the January 2023 renewal period,” Liu said.
Finally, Liu highlighted the drivers for investor allocations to ILS as an asset class, with these continuing to hold true as we move into 2023.
“We have continued to recognize the primary value proposition of ILS as an asset class with low structural correlation to the performance of other asset classes, and offering, in our view, a compelling set of risk/return characteristics,” Liu explained.
Adding that, at Amundi US, “We believe those factors remain true as investors have begun confronting the reality of rising interest rates in both the present and the near term, and possibly for longer.”