Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Stone Ridge interval ILS fund shrinks again, cat bond focused fund stable


Stone Ridge Asset Management’s mutual insurance-linked securities (ILS) fund assets shrank slightly in the last quarter of record, with the Interval ILS fund down roughly 5% again, but the managers catastrophe bond focused fund was more stable and grew almost 1% in the period.

stone-ridge-asset-management-logoOverall, Stone Ridge’s mutual ILS fund assets under management declined by around 4% in the quarter to October 31st 2019, as the effects of catastrophe losses around the globe continued to weigh on the interval style fund in particular.

But the rate of decline has steadied over recent quarters, suggesting a return to growth could be possible for both funds over 2020, depending on levels of reinsurance market impacting catastrophe loss event activity of course.

Stone Ridge’s overall assets under management in its two mutual ILS funds declined to $5.54 billion in the quarter, down from $5.78 billion at July 31st.

The managers ILS and reinsurance linked assets under management (AuM) now stand 20% lower than their high-point of $7 billion at the end of April 2018.

However, as we explained last week, Stone Ridge has also added a considerable amount of new assets to its private ILS offering, which is focused on reinsurance quota shares, where the manager revealed another $1.5 billion of raised assets and commitments to deploy.

So, despite the continued shrinking of its interval ILS fund, Stone Ridge’s reinsurance assets have actually increased, back to around their high point, and so the manager became an even more important quota share market at the recent January renewals.

On the mutual investment fund side, the more catastrophe bond focused mutual fund strategy, the Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), grew by roughly 1% in the quarter to end October 2019 with around $917 million of assets.

Given the attractive opportunities and strong deal flow in the catastrophe bond market over recent weeks, there is every chance that Stone Ridge will be able to grow this strategy back over $1 billion this year.

Cat bonds currently offer a lot of value for investors and this Stone Ridge fund has performed particularly well, as well as a six year track record.

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Stone Ridge Asset Management CEO Ross Stevens explained the performance of the High Yield Reinsurance Risk Premium Fund, “Fully invested for more than 6 years, it’s outperformed every one of the 30+ funds in the Eurekahedge ILS Advisers Index and has been the only reinsurance fund in that group to “beat the market,” outperforming the Swiss Re Global Cat Bond Index.

“Moreover, SHRIX has been profitable 24 out of 26 quarters, including 17 quarters in a row during one stretch,xix while delivering a risk premium comparable to the historical equity risk premium and multiples of the historical credit risk premium.”

Stone Ridge’s other mutual ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), is more focused on collateralised reinsurance quota shares and private deals. As a result it takes more risk and therefore more losses in recent years.

The Reinsurance Risk Premium Interval Fund ended October 2019 with around 5% less assets, at $4.62 billion, down from the $4.87 billion it had at the end of July.

Stevens commented, “The same team manages SRRIX as SHRIX, with the same investment philosophy, market access, and execution discipline. SHRIX just takes (a lot) less risk so happened to do (a lot) better these last three years – both funds, each index-like, performed exactly as expected in light of industry events. In a textbook example of recency bias, SHRIX is growing while SRRIX – its own line item – is shrinking, for now.”

The portfolio is stabilising and while there appears some evidence of further declines in the values of certain positions, possibly affected by 2019 catastrophe loss activity including the Japanese typhoons, there is also evidence of some recovery and stabilisation of position values.

It will be interesting to see how this Interval fund portfolio changes at the January renewal, especially given the new private quota share reinsurance ILS strategy has grown at the same time.

Stone Ridge reported that conditions at the renewals have resulted in favourable increases in rates on the reinsurance quota shares it invests in, which bodes well for the returns of the Interval ILS fund over the coming months.

Stevens said that to really benefit from the returns of ILS and reinsurance investors need to commit to the asset class over the long-term, enabling them to benefit from market price cycles and earn back any losses suffered.

“Earning the reinsurance risk premium – or any risk premium – is impossible without the ability to resist recency bias. We share this foundational point in every introductory reinsurance meeting we have with potential investors, and I’ve written and re-written about this topic in past shareholder letters. If an investor can’t resist exiting after losses, it’s better to not invest in reinsurance at all – due to the left tail nature of the return distribution, market timing virtually guarantees a cumulative loss. The only way to earn the average is to stay in the trade,” he explained.

Adding, “The three-part fundamental thesis of reinsurance investing is clear. First, reinsurance has historically generated a significantly positive risk premium because it provides a valuable risk transfer service. Second, its returns have been uncorrelated to traditional financial assets. Third, its yields have been adaptive – that is, they have increased after losses. That’s it. We like simple at Stone Ridge.”

Stone Ridge remains one of the top-ten ILS fund managers in our Insurance Linked Securities (ILS) Investment Managers & Funds Directory.

With the inclusion of the new commitments and funds for its private quota share reinsurance investment strategy, Stone Ridge Asset Management is back to around $7 billion of ILS and reinsurance assets under management.

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