As of the 31st October 2014 the total net assets of New York based Stone Ridge Asset Management’s three insurance and reinsurance-linked investment funds had reached $2.124 billion, up by approximately 5% since the end of July.
Stone Ridge, a provider of mutual fund investments across a variety of beta focused alternative risk exposures including reinsurance and insurance-linked securities (ILS), has been consistently growing its assets under management of its three reinsurance and ILS mutual funds since its launch.
The firm launched its first reinsurance and ILS funds in late 2012, with the Stone Ridge Reinsurance Risk Premium Fund and Stone Ridge High Yield Reinsurance Risk Premium Fund, with assets of around $350m at launch. Stone Ridge then grew its reinsurance linked assets under management to $766m by July 2013, then to $1.4 billion by January 2014 with the help of the launch of the Stone Ridge Reinsurance Risk Premium Interval Fund, then again to $1.8 billion by the end of April and to $2.03 billion at July 31st.
Now, in its latest annual report on its funds performance, Stone Ridge reports the total net assets of the three reinsurance and ILS funds as $2.124 billion, an increase of just under 5% since July 31st.
In terms of performance, Stone Ridge’s reinsurance linked funds have had a good year, despite a few impacts to them from events around the world to which it had some exposure. In the letter to shareholders Ross Stevens, Founder and CEO of Stone Ridge Asset Management, revealed a few events that had hit his funds since their launch.
“Our portfolios have taken many hits including material losses from both Malaysian Airlines crashes, a refinery explosion in Russia, devastating blizzards in Japan, and Hurricane Odile which wrecked Cabo San Lucas,” Ross commented in the letter.
It’s interesting that Stevens mentions hurricane Odile. Stone Ridge holds around $1m worth of MultiCat Mexico Class C notes, which in its portfolio breakdown it has marked down by around 50%, reflecting the expectation at the time of the report (31st October) that the notes may face a 50% loss if triggered. Of course we now know that the trigger had not been breached, so no doubt Stone Ridge will have marked these notes back to market again, which would add around $500,000 to its total net assets.
So Stone Ridge has faced a few losses in its range of reinsurance funds. This is no surprise given its exposure to catastrophe bonds, sidecars, quota-share reinsurance agreements and other privately transacted insurance-linked securities (ILS) deals. Exposure is a given, but it is how the portfolio is diversified that matters to enable the funds to absorb some level of expected loss.
In terms of performance, Stone Ridge reports that its Stone Ridge Reinsurance Risk Premium Fund had a one-year return of 8.39%, while its return since inception is annualised at 7.42%. For the High Yield Reinsurance Risk Premium Fund the one-year return was 9.44%, while the annualised return since inception is 8.63%. For the Reinsurance Risk Premium Interval Fund, which only launched last December, Stone Ridge reports a return since inception of 8.4%.
So despite a few attritional losses Stone Ridge’s reinsurance-linked ILS mutual funds have been performing extremely well and investors are sure to be pleased with this performance in a low-yielding economic environment.
Stevens reveals that the Stone Ridge funds have been profitable for 16 out of the last 17 months, which is impressive performance particularly in an environment when catastrophe bond mark-to-market prices have fluctuated considerably. This shows that, in the current loss environment, the diversification strategy is working.
Stevens wisely warns that times will not always be this good, saying; “Our performance during this period is unsustainable and materially understates the true risk of our strategies. Do not get lulled into a false sense of security when you look at the consistency of our past performance. In some future years, there will be tragic earthquakes and hurricanes. There will be market crashes. Our funds will have sharp drawdowns.”
The $2.124 billion of insurance and reinsurance linked assets is split across the three Stone Ridge reinsurance mutual funds. The Interval fund, which offers a higher risk strategy with regular liquidity intervals to its investors, remains the largest of the three funds. All three funds have grown over the course of the year but the majority of the new capital raised from investors has been targeting the Interval fund it appears.
The Stone Ridge Reinsurance Risk Premium Fund, its lowest risk strategy, began the year with total net assets of $611.4m at the end of the first-quarter 2014. That increased to $722.4m by the end of April 2014, then to $763m by the end of July of this year. As of the 31st October 2014 this fund had total net assets of just over $789m.
The Stone Ridge High Yield Reinsurance Risk Premium Fund, which is a higher risk and return strategy, had assets totaling $242.9m at the end of the first-quarter, which increased by 28% to just over $311.1m at April 30th. This fund then hit $319.5m at the 31st July, and at 31st October had net assets of $333m.
The Stone Ridge Reinsurance Risk Premium Interval Fund, which follows the interval fund approach of offering staggered liquidity opportunities to investors, enabling it to invest in less liquid assets, is where much of the growth in Stone Ridge’s reinsurance-linked assets under management has come from in 2014.
The Interval Fund had total net assets of $606m at the end of Q1 2014, then grew by 26% to $761.5m at the end of April. The Interval fund added another 25%, to reach total net assets of $948.8m under management at 31st July 2014. At the 31st October the Interval fund had grown to $1.002 billion, another jump of nearly 6%.
As we wrote earlier in December, Stone Ridge is targeting to raise more capital for its Interval ILS fund. This is likely to put to work in January reinsurance renewal deals. A change to the prospectus for the Interval fund showed that Stone Ridge could add around $500m to this fund if it chooses. We would imagine that given the success it has had to date with its reinsurance and ILS funds that investor interest would have been sufficient, as long as the capacity deployment opportunities were attractive.
The split of investments in each of the funds remains as you’d expect, with the Reinsurance Risk Premium Fund still the most exposed to catastrophe bond investments, the High Yield Reinsurance Risk Premium Fund adding a little more return through exposure to sidecars and quota-share deals, while the Interval fund remains largely exposed to private ILS deals and quota-shares or sidecars.
The charts below break down the asset allocation for each of the three Stone Ridge reinsurance mutual funds as at the 31st October 2014:
As you can see from the above, the Reinsurance Risk Premium and High Yield Reinsurance Risk Premium funds have a roughly similar asset allocation, with the High Yield having slightly more capital allocated to quota-shares and reinsurance sidecars.
The Interval fund is very different though. It is predominantly allocated to quota-shares which are largely private ILS deals or sidecars, with just 15% allocated to catastrophe bonds. The Interval fund also allocates some capital, around $48m, to two ILS funds operated by Aeolus.
It is interesting to note however that the Interval fund actually holds the least amount of short-term assets (largely treasuries or money market funds). That is perhaps a little surprising, as the Interval fund holds the least liquid assets. However, with liquidity for investors on an interval basis Stone Ridge must feel confident that it can liquidate assets quickly enough to support any withdrawal needs.
With Stone Ridge targeting to raise new capital for its Interval fund and still with some room available to grow the other two reinsurance funds as well, it would not be surprising if it reached $2.5 billion of assets by the end of this renewal season. The Stone Ridge strategy, of offering mutual ILS funds to investors through networks of registered investment advisors has attracted significant attention, which has led to others now seeking to emulate its success.
With $2.124 billion of reinsurance-linked and ILS assets under management raised in less than two years since the firms launch, Stone Ridge is one of the fastest growing ILS asset managers in the market. Stone Ridge Asset Management remains firmly within the top ten ILS fund managers by size in our Insurance Linked Securities Investment Managers & Funds Directory.