Stone Ridge interval ILS fund shrinks further, but cat bond holdings rise

Stone Ridge Asset Management’s mutual insurance-linked securities (ILS) fund assets fell again in the last quarter of record, sliding just under 6% to end October 2020 with $3.82 billion of ILS assets across the two fund strategies.

That’s down around 30% on a year earlier, as Stone Ridge’s ILS mutual funds counted over $5.5 billion of assets between them at that time. The ILS asset pile had reached almost $7 billion across the two funds two years prior.

But Stone Ridge has repositioned its ILS strategies over the last year, with more of a focus on private funds, rather than these mutual fund strategies.

We believe some of the investors have now moved to the private funds and mandates which allocate to reinsurance and ILS, as these offer a preferable structure for longer-term, larger investors.

In the last quarter of record, to October 31st 2020, Stone Ridge’s higher-risk, less liquid interval style mutual ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), was the strategy that shrank, ending the quarter down 8% to $2.82 billion of assets.

In the same period, the investment managers more catastrophe bond focused, Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), actually increased in size, to end October 2020 up 3.5% at around $1 billion of ILS assets.

This continued the shift towards the more liquid cat bond investments in Stone Ridge’s mutual ILS funds, which had begun earlier last year.

An increasing focus on catastrophe bond investments at this time is no surprise, for two reasons.

Firstly, as the liquidity of cat bond investments and their secondary transferability makes for much easier management of a mutual fund strategy.

Secondly, because the catastrophe bond market has been achieving higher pricing in recent transactions and with high-levels of new issuance during the record year of 2020, it seems Stone Ridge has been selectively taking advantage of this.

For the year to October 31st 2020, the Stone Ridge Reinsurance Risk Premium Interval Fund strategy only returned just under 1%, suggesting it had experienced some losses throughout the year. It’s possible this fund, which still counts a considerable number of quota shares and private ILS deals in its portfolio was hit by the frequency of catastrophe losses during 2020 to a degree, perhaps also by some COVID related reserving (although we cannot confirm that).

Stone Ridge commented, “There were a number of natural and non-natural catastrophes around the world (most significantly, the COVID-19 pandemic and Hurricane Laura), along with a modest deterioration in estimates for ultimate losses for events in prior periods, that negatively impacted many of the Fund’s risk exposures, and, therefore, negatively impacted Fund performance. Given the high yields available for quota shares and catastrophe bonds, the Fund had a positive return despite the occurence of covered losses this year.”

Meanwhile, the more cat bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund delivered its investors a 5.73% return (in its institutional share class) for the year to the end of October 2020.

Stone Ridge explained, “There were a number of natural and non-natural catastrophes around the world (most significantly, the COVID-19 pandemic and Hurricane Laura) that negatively impacted some of the Fund’s risk exposures, and, therefore, negatively impacted Fund performance. Given the high yields available for catastrophe bonds and the fact that the majority of catastrophe bonds were not impacted by events this year, the Fund had a positive return.”

Catastrophe bonds now make up some 85% of the more cat bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund and at the end of October cat bonds made up 21% of the Stone Ridge Reinsurance Risk Premium Interval Fund, which has steadily risen higher since mid-2019 when they were just 10%.

Stone Ridge clearly recognised the benefits of more cat bonds and how they assist in the management of a mutual ILS fund strategy, while its focus on the less private and potentially longer-tailed ILS deals shifted to private ILS fund structures.

As we also explained recently, Stone Ridge successfully expanded the remit of its reinsurance and ILS investments to include non-catastrophe risks this year.