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Stone Ridge: Post-Event ILS fund positive for cedents capital structure


New York headquartered mutual fund manager Stone Ridge Asset Management, probably the fastest growing ILS and reinsurance fund manager in the market over the last few years, has revealed some interesting thinking about its new Post-Event fund.

Stone Ridge Asset Management, a beta, alternative risk and reinsurance focused mutual fund manager, launched the Stone Ridge Post-Event Reinsurance Fund towards the end of 2015.

The Stone Ridge Post-Event Reinsurance Fund has a strategy focused on providing its investors with a way to capitalise on opportunities in the is an insurance and reinsurance linked securities (ILS) space after large catastrophic events cause market dislocation.

But the benefits of a fund like this, which seeks to raise capital for deployment to take advantage of any property catastrophe reinsurance market dislocation or increase in pricing and rates, is not just for its investors, it is also good for cedents which will be in need of efficient reinsurance capital at that time, according to Stone Ridge.

Founder and CEO of Stone Ridge Ross Stevens tasked his team with understanding how the asset manager can become more “antifragile” and be able to better cope, in fact come out the other side stronger, after a major disaster strikes and impacts its funds.

Stevens notes the importance of being able to structure an ILS asset manager, its funds, capital, ability to raise new capital, processes and resources, in order to be there when disaster strikes, both from a point of view of taking advantage of opportunities during a market dislocation as well as being there to serve both investor clients and reinsurance cedents.

The ILS and reinsurance linked investment market has not yet faced its major disaster moment, but it will come. At some point the earth will shake in a major city, Florida will see another direct hit from a Category 5 hurricane or Europe will feel the brunt of an extreme winter windstorm.

When that happens and the reinsurance market is paying in full, resulting in ILS managers facing large claims payments, catastrophe bond maturities and general collateral lock-up and subsequent release to cedents, there is an opportunity to both profit from the dislocation this causes as well as to provide much-needed capacity to existing and new cedents.

By being there to provide this capacity to cedents when the worst has just happened, ILS fund managers can hope to be the source of continuity (in terms of risk capital), but in order to do so need to plan and develop the structures to support this.

That’s exactly what Stone Ridge has tried to do with its Post-Event reinsurance fund.

In his letter to investors recently, CEO Stevens wrote that the Stone Ridge Post-Event Reinsurance Fund will “activate and collect client assets only after industry-changing disasters, the same kind of “CNN events” that will cause our Reinsurance Funds to have material drawdowns.”

Stevens notes that these “CNN events” historically cause spikes in the reinsurance pricing cycle, with post-event reinsurance yields providing opportunities to get back into the market at better rates, while providing much-needed risk capital liquidity to cedents.

When activated by a major drawdown on the existing Stone Ridge Reinsurance Funds, the Post-Event fund will “become the sole channel to access the Stone Ridge Reinsurance Funds. SRPEX is available only to existing clients at the time of its activation and it does not charge any additional management fees or fund expenses,” Stevens explains.

“How can a fund that charges no fees and has no assets help a firm, its clients, and its reinsurance partners become Antifragile?” Stevens asks.

For Stone Ridge’s investor-base the Post-Event fund means “access to valuable post-event capacity with the largest global reinsurers.” For the cedents who utilise the capital provided by the investors through Stone Ridge’s funds, as collateral for reinsurance deals, the Post-Event fund means “balance sheet security and the ability to play post-event offense, so their capital structure becomes Antifragile.”

That’s really a key point. Positioning your ILS fund to be able to supply the much-needed protection to the market when all else has been exhausted, collateral locked up, losses developing and both ceding insurers and reinsurers are operating bare (as existing cover may have paid out), can only raise your profile and help to build stronger relationships.

Positioning yourself as a provider of risk capital and capacity that will be there, with liquidity, after the worst catastrophes ad disasters strike the market is a shrewd place to be. Stone Ridge clearly believes that its Post-Event fund will help to do this and make its capacity even more relied upon by cedents looking for certainty and continuity of capital after major event losses.

Finally, for Stone Ridge itself, Stevens notes that the Post-Event fund can help it to ensure that “post-event assets under management (AUM) goes up instead of down,” another important point for any ILS manager to consider.

When your collateral that was deployed into the market is locked up, after a market changing loss event has occurred, being able to raise new capital and get it deployed quickly could make the difference between being able to ride the wave of a market dislocation and missing it all together.

Especially given the liquidity of efficient capital from ILS players could ensure that any dislocation is far shorter than those seen historically. Putting in place structures and processes to ensure you can capitalise on the pricing cycle at the right time and quickly could be key.

Also read:

Stone Ridge ILS & reinsurance assets up to $3.86bn, as returns slow.

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