Stone Ridge reinsurance fund assets stable despite $1bn loss pay-out

In the last reported quarter to October 31st 2017 insurance-linked securities (ILS) and reinsurance linked asset growth at investment manager Stone Ridge Asset Management’s mutual ILS funds fell to its slowest ever rate, as around $1 billion of catastrophe losses and mark-downs reduced the value of many ILS investment positions.

Stone Ridge Asset Management has experienced impressive growth since launching its ILS and reinsurance linked investment strategies back in early 2013.

At the last reporting juncture the managers ILS and reinsurance linked assets under management had passed $6 billion for the first time, reaching $6.14 billion at July 31st 2017.

One-quarter later Stone Ridge now reports its total ILS and reinsurance linked assets under management as very slightly lower at $6.12 billion. But this is after paying out roughly $1 billion of losses to counterparts, which provides another example of an ILS fund manager maintaining its assets under management despite the major catastrophic losses of recent months.

Looking at the value of many investment positions in the ILS fund portfolios versus their initial investment costs, it is clear that Stone Ridge continued to grow its capital from third-party investors during the quarter.

However, losses suffered from catastrophe events including hurricanes Harvey, Irma and Maria, as well as the California wildfires have hit many of the managers reinsurance and retrocessional investments.

At October 31st, the investment and mutual fund manager’s interval fund structure, the Stone Ridge Reinsurance Risk Premium Interval Fund, had grown to its largest ever end-of-quarter size, reaching $5.02 billion of ILS and reinsurance assets, up slightly from $4.95 billion at the end of July 2017.

The manager’s other ILS fund, the Stone Ridge High Yield Reinsurance Risk Premium Fund, shrank during the last quarter on record, falling to $1.1 billion of ILS assets under management, down from $1.19 billion at July 31st.

Both funds are now negative for the last year thanks to the impact of recent catastrophe loss events, with the Reinsurance Risk Premium Interval Fund at -9% for the last year, while the High Yield Reinsurance Risk Premium Fund is down at -4.85% for the year to October 31st 2017.

“There were a number of natural and non-natural catastrophes around the world (most significantly Hurricanes Harvey, Irma, and Maria and California wildfires) that negatively impacted many of the Fund’s risk exposures, and, therefore, negatively impacted Fund performance,” Stone Ridge Asset Management explained.

Stone Ridge Asset Management now commands over $14 billion of assets across a range of investment strategies, with the ILS and reinsurance funds making up over 40% of the managers total investment assets.

The firm believes that reinsurers are “strategically leveraging” the managers investment capital to assist with their own growth, something even more apparent after the major losses suffered this year.

Ross Stevens, CEO of Stone Ridge Asset Management, explained in his annual letter to shareholders, “Many cynical industry participants assumed that in a hard market, reinsurers would share less risk with us and keep more of the higher-yielding business for themselves. Exactly the opposite has occurred. After a $100+ billion loss year for the industry, globally leading reinsurers – our core partners that we have been working with for years – made Stone Ridge their first post-event call.

“While we hoped for and expected this behavior, post-event reactions were untested. That’s no longer true. Most important, our ecosystem of investors, reinsurers, and Stone Ridge funds proved to be Antifragile – the ultimate hedge against disasters. The bottom line is that the best of the reinsurance industry continues to grow with Stone Ridge, strategically leveraging our capital to extend their own lead in the market.”

It is this ability to provide continuity to clients, be they investors or the cedents Stone Ridge provides reinsurance and retrocession capital to, that enables ILS fund managers to continue to grow even in a particularly heavy loss year.

Looking at the Stone Ridge ILS fund investment portfolio disclosures, it’s clear that many of the reinsurance sidecar and private ILS quota-share deals that the manager enters into have taken losses. In some cases the losses are more severe than others, but the fact that Stone Ridge came out of that last quarter with its total ILS assets under management barely dropping is a testament to the role it has carved out for itself in the reinsurance marketplace.

In fact, Stone Ridge paid around a significant amount of losses due to the impact of the catastrophe events, according to the manager.

The company explained, “Our Reinsurance funds enabled $1 billion to flow to the victims of the California wildfires, and Hurricanes Harvey/Irma/Maria, in their darkest hour.”

That’s around 17% of the managers total ILS assets as of the time the first hurricane struck and with that large a draw-down it is even more impressive that by the end of October 2017 Stone Ridge was back with almost the same level of ILS assets under management as it had prior to the storms.

There are clear examples of where ILS assets have been impacted by the hurricanes and major catastrophe losses of the second-half of 2017, with a number of stand-outs including:

• A loss from an investment in the World Bank IBRD / FONDEN 2017 catastrophe bond Capital-At-Risk Series 113 tranche of Class A notes, which was a total loss due to the northern Mexico earthquake in September.
• Large mark-downs to certain tranches of cat bonds including: SCOR’s Atlas IX Capital Limited (Series 2015-1) and Atlas IX Capital DAC (Series 2016-1), XL Catlin’s Galileo Re Ltd. (Series 2015-1), Everest Re’s Kilimanjaro II Re Ltd. (Series 2017-1) and Kilimanjaro II Re Ltd. (Series 2017-2), Argo Group’s Loma Reinsurance (Bermuda) Ltd. (Series 2013-1), Nationwide’s Caelus Re V Ltd. (Series 2017-1), USAA’s Residential Reinsurance 2014 Ltd. (Series 2014-1), Heritage’s Citrus Re Ltd. (Series 2016-1), Safepoint’s Manatee Re Ltd. (Series 2016-1) and others.
• Evidence of reduced valuations for investments in some of Swiss Re’s Sector Re sidecar tranches, as well as other major reinsurers sidecars.
• Reduced valuations for many private ILS transactions and quota share preference share investments. It’s difficult to see which are due to losses and which could be redemptions, or held collateral from prior loss events. But we assume the majority of these are due to the catastrophe events of recent months.
• Significant reduction in value of some of the investments in the Aeolus Property Catastrophe Keystone Funds.

For the most complete view of the portfolio details it is best to view the latest annual report for the Stone Ridge ILS Interval Fund where you can see the cost at acquisition of many ILS investment positions and their valuations at October 31st.

Losses like those Stone Ridge has experienced are to be expected in reinsurance and ILS investing, by allocating to insurance-linked investments you are assuming catastrophe (and other) risks, after all.

Stevens explains, “What we do is very risky. Do not get lulled into a false sense of security when looking at the consistency of our past results. In future years, there will be tragic earthquakes and hurricanes causing industry losses far worse than those this year.”

But with better rates now available in reinsurance and ILS investments, as the brokers have reported at the key January 1st 2018 renewals, Stone Ridge will be aiming to recover from the decline caused by the 2017 loss events and deliver sustainable long-term returns to its investors.

It will be interesting to see just how big the Stone Ridge Asset Management mutual ILS funds have become for the renewal, which we’ll be able to report on at the next disclosure later this quarter.

It is likely that Stone Ridge will end the current reporting period with a significant hike in ILS and reinsurance linked assets under management, as demand for capacity at efficient rates will have made it a compelling counterparty at the renewals for many re/insurers.

Join us on February 2nd in New York for our upcoming ILS conference