New York based Stone Ridge Asset Management, the beta and alternative risk focused mutual fund manager, increased its insurance-linked securities (ILS) and reinsurance linked assets under management by 4% to $3.86 billion by 31st October 2015.
Reporting its annual results yesterday, Stone Ridge revealed that continued growth in its assets has been seen, even in this quieter period for opportunities to deploy capital in the reinsurance and ILS market, but also revealed how the impact of lower rates and pricing has hit its returns.
Stone Ridge’s key strategy, of offering ILS and reinsurance linked investment opportunities in 40’s Act compliant mutual funds to investors through a network of registered investment advisors (RIA’s), is still paying off. But no matter how much capital can be raised, the returns are subject to broader market forces, with the softening reinsurance market clearly taking a toll on returns.
First the growth of assets across Stone Ridge’s three ILS and reinsurance linked investment funds.
Stone Ridge, which launched in late 2012 and raised assets of around $350m in two funds, the Stone Ridge Reinsurance Risk Premium Fund and Stone Ridge High Yield Reinsurance Risk Premium Fund, for the start of 2013 and has been growing steadily ever since.
The ILS and reinsurance linked assets managed grew 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, then $2.03 billion at July 31st followed by another leap to $2.124 billion at the 31st October, then up another 42% reaching $3.006 billion at the 31st January 2015, then up 9.4% to $3.288 billion as at the 30th April 2015, and to $3.713 billion at 31st July 2015, up another 13% or $425m.
Now in the annual report, which covers the year to 31st October 2015, Stone Ridge reports further growth of 4%, or $147m, across the three mutual ILS funds, taking the total reinsurance assets managed to the $3.86 billion.
Once again, most of the growth has come from the Stone Ridge Reinsurance Risk Premium Interval Fund, which grew by 5.5% from approximately $2.22 billion at the 31st July to just over $2.34 billion at the 31st October, an increase of over $120 million.
Meanwhile the lowest risk fund, the Stone Ridge Reinsurance Risk Premium Fund, grew from around $1.01 billion at the 31st July to $1.024 billion at 31st October, while the higher risk Stone Ridge High Yield Reinsurance Risk Premium Fund rose from $484.2 million to $495.7 million.
So growth continues, even over a period when there are few major renewals available to deploy capital into at Stone Ridge, as its reinsurance and ILS funds continue to attract investors. Last year the manager grew assets by slightly more over the same August to end of October period, but starting from a lower point of course.
It will be interesting to see what further growth has been achieved in time for the January 2016 renewal season, which will be revealed the next time the manager reports its assets.
Now onto the returns achieved in the year to the 31st October 2015.
The lowest risk Stone Ridge Reinsurance Risk Premium Fund saw a return of 4.22% for the twelve month period, while the Stone Ridge High Yield Reinsurance Risk Premium Fund returned 5.06%. The Stone Ridge Reinsurance Risk Premium Interval Fund managed 8.33% for the same period.
For comparison, in the prior year to 31st October 2014 the Stone Ridge Reinsurance Risk Premium Fund had a one-year return of 8.39%, the High Yield Reinsurance Risk Premium Fund was 9.44%, while the Reinsurance Risk Premium Interval Fund, which had only launched the previous December saw a return since inception of 8.4%.
The annualised returns since inception for the three funds now sit at 6.24% for the Reinsurance Risk Premium Fund, 7.32% for the High Yield Reinsurance Risk Premium Fund and 8.86% for the Reinsurance Risk Premium Interval Fund.
So returns are certainly down, with reinsurance price softening one aspect for sure, but the annual report returns for the year to 31st October were also hit by losses, something that is assured to happen given the size and breadth of the Stone Ridge portfolios, making diversification of the portfolio so key.
All three funds were hit by a number of major insured loss events during the year, of which the manager said “There were a number of unexpected natural and man-made catastrophes around the world that negatively impacted certain of the Fund’s risk exposures, and therefore negatively impacted Fund performance, which we expect to be true every year.”
CEO of Stone Ridge Asset Management Ross Stevens explained some of the events that hit the reinsurance portfolios in his letter to investors in the annual report.
“2015 was far from a smooth ride and, given the diversity of our risk exposures, it never will be. Our reinsurance portfolios took many hits this year, including the Tianjin explosion in China, the Pemex explosion in the Gulf, Hurricane Patricia hitting the Jalisco coast, Cyclone Marcia smashing the Queensland coast, and brutal hailstorms in Sydney,” Stevens commented.
So Stone Ridge has faced a few losses in its range of reinsurance funds, which should not surprise anyone given the broad range of quota share, sidecar, private ILS deal and catastrophe bonds invested in.
Exposure is a given, which again makes how the portfolio is diversified so vital, to enable the funds to absorb some level of expected loss while still providing returns to investors that in the current climate remain attractive.
Having increased its ILS and reinsurance assets managed across its three ILS mutual funds to $3.86 billion, Stone Ridge Asset Management remains firmly in the top ten ILS fund managers in our Insurance Linked Securities Investment Managers & Funds Directory.