Stone Ridge raises ~$1.5bn to deploy in quota shares including non-cat risks

Stone Ridge Asset Management has raised significant new funds and commitments for quota share reinsurance investing for 2020, with these new funds raised outside of the managers typical mutual ILS funds and CEO Ross Stevens saying this new strategy will support about $1.5 billion of assets and also invest in non-catastrophe risks.

Stone Ridge Asset Management, the New York based mutual fund manager with a focus on alternative risk premia strategies including reinsurance and insurance-linked securities (ILS), has been investing in reinsurance, catastrophe bonds and ILS assets for six years now.

But the move that has come to light this week marks the first time the investment manager has looked to manage third-party investor assets for ILS and reinsurance deployment outside of its flagship mutual funds.

While Stone Ridge’s main dedicated mutual ILS fund strategies have been shrinking a little over the last year, the manager has quietly been doubling-down on the quota share business for which it is so well-known in its interval fund.

These private collateralised reinsurance quota share and sidecar deals see Stone Ridge allocating capital to support the businesses of many of the world’s leading insurance and reinsurance companies and the manager is now looking to build on this with what seems a private quota share reinsurance focused ILS fund.

According to Stone Ridge CEO Ross Stevens, recently executed quota share arrangements have seen a “material elevation in rates” as well as some improvements in terms and conditions, or both in certain cases, compared to prior years.

Stevens said this is partly market driven, but also down to Stone Ridge’s “market leading size in quota shares” with the execution and negotiation by the Stone Ridge reinsurance team on these renewals key to securing the best price and terms.

The attractive market conditions and much higher reinsurance rates has led Stone Ridge to look to expand its quota share activity, but outside of the mutual ILS funds and the managers largest fund the Stone Ridge Reinsurance Risk Premium Interval Fund.

It’s possible that this new quota share capacity and strategy is being managed using Stone Ridge’s recently established, Bermuda-based reinsurance platform named Longtail, which we have documented at length previously.

Stone Ridge has raised “significant capital” for reinsurance quota share business from institutional investors, Stevens explained.

This includes capital raised from one of the largest life insurance companies in the world, Stevens said.

He went on to say that the 2020 quota shares executed by Stone Ridge are set to deliver “the most attractive rates and terms & conditions since the firm began.”

So he’s not surprised such sophisticated institutional investors see an opportunity for an “entry point as part of a long-term reinsurance allocation.”

The shift to managing assets outside of the mutual fund is perhaps more suited to the very large institutional investors that the ILS fund market is more typically working with.

Stone Ridge’s mutual fund focus has meant it works with registered investment advisors (RIA’s) to access investors, which are often sophisticated high-net worth individuals, family offices and other smaller institutions.

But this new strategy, of investing in reinsurance outside of the mutual ILS funds, positions Stone Ridge as also seeking assets from the world’s largest institutions such as pension and sovereign wealth funds as well, an interesting and perhaps timely pivot while the mutual funds continue to recover from recent loss years.

Stone Ridge is also expanding its remit in terms of diversification as well, beginning to allocate more capital to quota shares in non-property catastrophe lines of business.

The Stone Ridge ILS funds have been largely focused on property and catastrophe reinsurance or retrocession risks to-date, but now Stevens says that the investment manager will also look to non-catastrophe lines including some longer-tailed business.

Given non-cat lines such as D&O, E&O and General Liability are seeing material rate increases as well, Stevens said that Stone Ridge is now sharing some of its core reinsurance partners non-catastrophe risk through quota shares with investors, also outside of the mutual ILS funds.

Highlighting “the long-term power of reinsurance as a diversifier to traditional investments”, Stevens explained that new capital for catastrophe and non-catastrophe business outside of the mutual funds will support “about $1.5 billion of assets when fully deployed.”

He also said that Stone Ridge expects this part of its business will “grow substantially” as well.

It’s significant news, as Stone Ridge has become a particularly important player in terms of capacity and this shift towards private ILS investment management for major institutional investors will likely see the firm competing more directly on fundraising with other ILS funds and becoming an ever more important capital provider for the re/insurers it works with.

The expansion to non-catastrophe risks is also important news, as it’s yet another sign that the ILS market is ready and able to expand its remit more than many are perhaps ready to admit.

Clearly there is appetite for collateralised quota shares of liability and mid-to-longer tailed risks, both on the ceding reinsurance company side and the investors as well.

Stone Ridge’s ability to be helpful to re/insurers will also be boosted by this move, as the manager now has multiple balance-sheets it can offer to ceding companies, which can work together to deliver more limit capacity while keeping the risk under control in their separately sourced fund strategies.

Stone Ridge is, as ever, positioning itself to be at the forefront of the market and it will be interesting to watch how this new strategy evolves.