City National Rochdale | June 25, 2020

2020 Hurricane Season Preview

An above-normal 2020 Atlantic hurricane season is expected — the outlook predicts a 60% chance of an above-normal season, a 30% chance of a near-normal season and only a 10% chance of a below-normal season.

We are pleased to confirm that the current portfolio does not contain any position with direct exposure to pandemic risk or any form of excess mortality risk.

Market dynamics (in both reinsurance and traditional) further help enable us to justify our confidence in the strategy and emphasize the importance of implementing non-correlated return solutions to a traditional investor’s portfolio — which we believe can be achieved with CNR’s Select Strategies Fund.

As we focus our attention on a safe and healthy reopening of the country, it remains important that we also remember to make the necessary preparations for the upcoming hurricane season. With that said, CNR’s Select Strategies team feels it is an appropriate time to provide you and your clients a bit more context on the factors that influence the space, an outlook for the season and a look at how our portfolio is currently structured.

SHOULD WE TALK ABOUT THE WEATHER?

To give you the tools to briefly put on the cap of “Meteorologist” — the environmental factors that contribute to hurricane formation (sea surface temperatures, high altitude air temperatures, air moisture levels, distance from the equator and wind shear values) are continually considered and modeled throughout the portfolio. In studying the factors contributing to hurricane formation, the National Oceanic and Atmospheric Administration (NOAA) provides estimates regarding the number of named storms expected to form in the upcoming season, those storms that are expected to develop into hurricanes and those expected to develop into major hurricanes.

With that said, an above-normal 2020 Atlantic hurricane season is expected — the outlook predicts a 60% chance of an above-normal season, a 30% chance of a near-normal season and only a 10% chance of a below-normal season. NOAA’s Climate Prediction Center is forecasting a likely range of 13 to 19 named stormed (winds of >39 mph), of which six to 10 could become hurricanes (winds of >74 mph), including three to six major hurricanes (category 3, 4, or 5; with winds of >111 mph).

The combination of several climate factors is driving the strong likelihood for above-normal activity in the Atlantic this year. El Nino-Southern Oscillation (ENSO) conditions are expected to either remain neutral or to trend toward La Nina, meaning there will not be an El Nino present to suppress hurricane activity. Also, warmer-than-average sea surface temperatures in the tropical Atlantic Ocean and Caribbean Sea, coupled with reduced vertical wind shear, weaker tropical Atlantic trade winds and an enhanced west African monsoon, all increase the likelihood for an abovenormal Atlantic hurricane season. NOAA will also update the 2020 Atlantic season outlook just prior to the peak of the season (early August).

With that said, the path and landfall location of a hurricane is highly random, and even the most sophisticated models do not have the predictive power to forecast accurately the path of a hurricane (those that make landfall are what we would typically be concerned about).

POTENTIALLY FAVORABLE MARKET DYNAMICS

Pricing in the ILW market continues to be very strong, as many participants are still experiencing collateral trapping and adverse loss development from the series of events across 2017 to 2019. From a demand standpoint, we expect opportunities in the market to continue as demand for protection increases from both reinsurers (due to losses on their balance sheets) and multi-strategy funds (due to portfolio rebalancing and/or redemptions). Limited supply of third-party capital in the broader Insurance-Linked Securities (ILS) market is expected to further strengthen our position in both the Industry Loss Warranty (ILW) and catastrophe bond markets, as demand for protection and liquidity is currently unmet.

As anticipated, the busy January renewal period continued well into the first quarter, as many reinsurers and ILS managers were unable to obtain protection before January 1. The months of February and March, typically quiet in terms of trading activity, were very active this year. With that said, attractive pricing dynamics achieved at year-end 2019 have persisted into 2020.

In regard to COVID-19, we would be remiss to not mention how it has impacted the space. First, we are pleased to confirm that the current portfolio does not contain any position with direct exposure to pandemic risk or any form of excess mortality risk. Second, we believe the continued spread of infections will have both direct and indirect effects on the insurance industry, some of them offering potential opportunities for our strategy. With that said, counterparty demand remains strong, and we do not expect any knock on impacts from COVID-19 to impact the Fund’s ability to source attractive deals as we enter hurricane season.

WHAT THIS CAN MEAN FOR CNRLX INVESTORS

In terms of exposure details, as of May 31, 2020, our portfolio includes 147 investments — 119 ILWs and 28 cat-bonds. Portfolio construction has remained consistent over time, with a focus on seeking diversified, capital-efficient opportunities. The portfolio remains focused on the U.S. ILW, market where risk is well-modeled and where we believe the potential for risk-adjusted returns remain very attractive. As always, the portfolio structures bespoke investments that may enhance diversification by peril, severity, region and frequency. These ILW contracts may reduce the counterparty’s basis risk, while providing our portfolio with the potential for greater diversification through granularity, and ultimately we believe should enhance our risk-adjusted returns. A breakdown of distribution of risk by peril region is shown above.

In summary, we believe opportunities within the ILW market remain dynamic and attractive. Market dynamics (in both reinsurance and traditional) further help enable us to justify our confidence in the strategy and emphasize the importance of implementing non-correlated return solutions to a traditional investor’s portfolio — which we believe can be achieved with CNR’s Select Strategies Fund.

We thank you for your continued support.

Key Points

An above-normal 2020 Atlantic hurricane season is expected — the outlook predicts a 60% chance of an above-normal season, a 30% chance of a near-normal season and only a 10% chance of a below-normal season.

We are pleased to confirm that the current portfolio does not contain any position with direct exposure to pandemic risk or any form of excess mortality risk.

Market dynamics (in both reinsurance and traditional) further help enable us to justify our confidence in the strategy and emphasize the importance of implementing non-correlated return solutions to a traditional investor’s portfolio — which we believe can be achieved with CNR’s Select Strategies Fund.

Important Disclosures

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.

The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

Diversification does not ensure a profit or protect against a loss in a declining market.

Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Dow Jones US Select Dividend Index includes a selection of stocks based almost entirely on dividend yield and dividend history. Stocks are also required to have an annual average daily dollar trading volume of more than $1.5 million. These criteria help to ensure that the index represents the most widely traded of the markets highest yielding stocks.

The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The Bloomberg Barclays U.S. Corporate High Yield Index covers the U.S.-dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.

The MSCI Europe Index is a free-float weighted equity index measuring the performance of Europe Developed Markets. It was developed with a base value of 100 as of December 31, 1998.

The MSCI Emerging Markets Asia Index is a free-float weighted equity index measuring the performance of Asia Emerging Markets. It was developed with a base value of 100 as of December 31, 1987.

The MSCI Emerging Markets Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

ICE BofAML High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets corporate debt publicly issued in the US domestic or eurobond market.

The ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.

This presentation is for general information and education only. City National makes no representations or warranties in respect of this presentation and is not responsible for the accuracy, completeness or content of information contained in this presentation. City National is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained in or from the site. The information in this presentation should not be used to obtain credit or for any other commercial purpose nor should it be construed as tax, accounting, regulatory or legal advice. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations and you should seek professional advice from your advisor. Nothing in this presentation should be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the viewer’s specific investment objectives. Any financial instrument discussed in this presentation may not be suitable for the viewer. Each viewer must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this presentation and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results.

The material contains forward-looking statements regarding intent, beliefs, or current expectations which are used for informational purposes only. Readers are cautioned that such forward-looking statements are not a guarantee of future performance, involve risks and uncertainties, and actual results may differ materially from those statements as a result of various factors. The views expressed are also subject to change based on market and other conditions. Furthermore, the opinions and information presented do not involve the rendering of personalized investment, financial, legal, or tax advice. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the June 17, 2020 presentation, “Making Progress,” is reprinted by permission from City National Rochdale. City National (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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