Stone Ridge ILS assets shrinkage slowed to less than 3% in last quarter

The shrinking of Stone Ridge Asset Management’s insurance and reinsurance linked assets under management slowed again in the investment managers last quarter of record, as its ILS assets ended July at $5.78 billion.

The rate of decline in ILS assets under management at Stone Ridge has slowed over each recent quarter, having been as high as 11% at the end of 2018, then falling 4% in the quarter to the end of April 2019.

Now, the ILS assets invested by Stone Ridge have shrunk by less than 3% between May and July 31st 2019, signalling a slow down in attritional losses and loss creep to the catastrophes bonds, private insurance-linked securities (ILS) and collateralised reinsurance contracts the manager invests in.

It also signals a slowdown in any redemptions the manager has seen as well, as some investors have cycled out of ILS strategies after the very heavy catastrophe loss impacts of the 2017 and 2018 underwriting years.

Stone Ridge’s ILS and reinsurance linked assets under management (AuM) now stand roughly 17% lower than their high-point of $7 billion at the end of April 2018,  which is due to the impacts of 2017’s hurricanes, the two consecutive years of California wildfires and other major catastrophes including Japanese typhoon Jebi.

In addition, some investor redemptions have also dented the ILS asset base at Stone Ridge, which is really no surprise given the back-to-back significant catastrophe loss years that hit its two dedicated ILS mutual fund investment strategies and the rest of the ILS fund market.

Stone Ridge Asset Management’s total net assets across its two dedicated ILS mutual funds fell -11% to $6.15 billion at January 31st 2019, then falling at a slower pace of just under -4% to $5.93 billion at April 30th 2019.

That still leaves Stone Ridge as a top-ten ILS fund manager in our Insurance Linked Securities (ILS) Investment Managers & Funds Directory.

The slowing decline in assets reflects the fact that asset managers like Stone Ridge are increasingly realising their losses from the two years of catastrophes, dealing with issues related to trapped collateral and seeing a slowing rate of investor redemptions as well.

Still, Stone Ridge’s ILS fund portfolios remain full of positions that are devalued and the cost of the assets is much higher than their overall valuation, particularly for private preference shares in sidecars and quota share ILS deals.

In addition, the catastrophe bond portfolios remain marked down below their cost price, across both of Stone Ridge’s ILS funds, which reflects the fact there are still cat bond losses to fully realise, although the positions are already marked down to account for it.

It could be some time until all of these losses are realised and the valuations of the portfolios become closer to their original costs, as distressed positions payout and are shed from the funds.

Stone Ridge hasn’t been investing heavily in the last quarter either, with only a few new sidecar positions taken and some cat bonds added to the ILS fund portfolios.

The managers more catastrophe bond focused mutual fund strategy, the Stone Ridge High Yield Reinsurance Risk Premium Fund, has actually increased its assets slightly during the period.

This fund had ended April 2019 with $876 million of total net assets, but at the end of July its assets had risen slightly to $909 million, their highest level in nine months.

Most of this rise is due to mark-to-market increases on certain catastrophe bond positions that have delivered positive premiums over the last quarter of record, it seems.

Meanwhile, Stone Ridge’s flagship ILS strategy, the Stone Ridge Reinsurance Risk Premium Interval Fund had shrunk to $4.87 billion by July 31st 2019, down from the $5.06 billion reported at the end of April.

Largely this is due to the ongoing, albeit slowing, impacts of losses and loss creep it appears, with some portfolio valuations having declined further again.

The gap between the cost of the investments and their current value has shrunk as well, which is a positive sign for the portfolio working through its losses.

The Stone Ridge Interval ILS fund had an almost $800 million gap between asset cost and valuation at the end of April 2019.

But at the end of July the cost of assets in the fund is reported as just under $5.29 billion, while their valuation at just under $4.69 billion is now only $600 million lower.

It’s expected that this gap will continue to shrink, as losses are realised and some performance returns to positions where losses turned out not to be as severe as positions had been marked for.

Of course, the Stone Ridge ILS funds will also have to deal with any impacts from 2019 catastrophe events, such as hurricane Dorian and typhoon Faxai, which have the potential to impact some quota share positions and sidecars it currently seems.

However, any impact from these events is likely to be largely attritional in nature and not anywhere near as severe as the previous two years of loss events.

Finally, it’s worth noting that in the latest Stone Ridge ILS fund portfolio disclosure there isn’t yet any mention of the evolving work to establish the Longtail Reinsurance platform it has been building.

As we’ve reported, the asset manager has begun the process of raising capital for a new reinsurance platform named Longtail, having registered a management company Longtail Insurance Holdings Ltd. and a reinsurer Longtail Re Ltd. in Bermuda, as well more recently as a fund vehicle in the Cayman Islands the Longtail Fund I LP.

It’s still not entirely clear how Longtail fits into Stone Ridge’s ongoing reinsurance linked investment plans, but as we explained it shows the manager looking to control more of its own destiny in the space by creating a platform to support its activities, which will make its access to risk increasingly efficient.

Stone Ridge remains well positioned in terms of assets under management in our directory of ILS Investment Managers & Funds. It will be interesting to see how the manager’s strategies evolve over the rest of the year.