Stone Ridge Asset Management, the New York based asset manager with a focus on alternative risk premia strategies including reinsurance and insurance-linked securities (ILS), successfully expanded the remit of its reinsurance and ILS investments to include non-catastrophe risks this year.
Almost a year ago we revealed that Stone Ridge Asset Management was set to broaden its target for reinsurance linked returns to include non-catastrophe risk classes of business, as the firms CEO Ross Stevens revealed it was set to launch new strategies outside of its mutual ILS funds.
These new strategies were expected to attract as much as $1.5 billion of investor commitments and feature a broader range of quota shares than just the pure property catastrophe reinsurance risks Stone Ridge’s mutual ILS funds were known for.
CEO Stevens explained in a shareholder letter yesterday that the expansion of Stone Ridge’s reinsurance strategy was successful, as it allocated investor capital to non-catastrophe lines of reinsurance for the first time in 2020.
Stevens said that this helped the investment manager move even closer to its target allocation strategy, which is an offering of ten specific asset classes each with very low correlations to broader financial markets, of which reinsurance now makes up two.
It’s always helpful to gain strategic insights from managers like Stone Ridge and its CEO Ross Stevens and in his latest shareholder letter he treats us to a little more strategic insight into why the Stone Ridge strategy is made for the new ultra-low for longer rate world.
“Since 2012, we have been building our portfolio of business arks ahead of the no-yield flood, now in the early innings of submerging the world. While Stone Ridge is just one small firm and we can only do so much, it is, and has always been, our mission to help the vulnerable and unprepared. All along, we knew the fiat flood was coming, we just did not know when or from what, but we did know that the vast majority would simply not know how to prepare, or even that they should. So – with humility, kindness, focus, and antifragility – we did, and are doing it, for them,” Stevens explained.
“At Stone Ridge, the embodiment of our risk management philosophy, and flood preparation, is the 10/10 (“Ten Ten”) portfolio. In its purest, unobtainable form, the 10/10 is 10 long-term allocations, each 10% weight, each with a persistent, pervasive, and intuitive risk premium, each uncorrelated with traditional markets, each uncorrelated with each other, each anti-fad.
“Our 10/10 concept leaped closer to reality in 2020 with two new additions. It now includes both catastrophe reinsurance and non-catastrophe reinsurance (new), alternative lending, market insurance, SFR (single family rentals), drug royalty, private investments, Bitcoin, and collectibles (new). In the last year, we went from seven elements to nine. We’re getting there,” he continued.
He also laid out what this means for investors, “At our “opponent’s slightest move” – a market crash, a sovereign default, a pandemic, the Fed’s forward annihilation of 60/40 – the 10/10 allows us to move first, a portfolio of business arks already in place. Its extraordinary diversification harmonizes with its quiet humility, structurally anticipating the un-anticipatable, delivering peace of mind.
“If 2020 taught us anything, though, it’s that the peace we seek isn’t really peace of mind, it’s peace from mind. From the silent ruminations. “Do I have enough? Am I financially secure?” In the decades ahead, Stone Ridge will help as many people as possible answer those questions decisively and affirmatively. In this year of historic trials and tribulations, the 10/10 was tested, and was spectacular.”
Stone Ridge has embraced the alternative risk premia offering and placed reinsurance and insurance-linked securities (ILS), such as catastrophe bonds and private ILS transactions, right at the heart of its strategy.
Consider the investor looking for a way to access alternative forms of investment return in the current low-interest rate environment.
Your average ILS investor puts just a few percent of its assets into the ILS asset class, but likely has a whole range of other alternatives and diversifying asset types also within its portfolio.
With Stone Ridge, investors can gain the few percent of exposure to reinsurance and insurance-linked securities (ILS), while also investing across a range of other alternative risk premia driving asset classes, all of which exhibit a general lack of correlation to wider financial markets and importantly to each other as well.
Adding non-catastrophe risk as another pillar within this investment strategy can only help to broaden the attraction for both high-net worth individual investors and also institutions.
Stone Ridge’s Bermuda and Cayman Islands-based reinsurance platform named Longtail, which we have documented at length previously, is one possible destination for these non-catastrophe risks, which would be appropriate given the name.
But Stone Ridge also manages private funds and mandates which allocate to reinsurance, we understand, so it is hard to define the destination of the non-cat risks accurately.
The mutual ILS funds operated by Stone Ridge remain largely catastrophe risk exposed, it seems at this time.
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