Beta and alternative risk premia focused U.S. mutual fund manager Stone Ridge Asset Management has continued to grow its insurance-linked securities (ILS) and reinsurance linked assets of its mutual ILS funds in the last quarter, reaching a new high of $6.14 billion of ILS assets under management.
The growth of Stone Ridges’ ILS and reinsurance linked assets under management picked up again in the quarter to the end of July 2017, as the manager added almost 8% of assets to reach $6.14 billion, rising from $5.7 billion at the end of April 2017.
Stone Ridge Asset Management’s growth in ILS has been extraordinary, having grown 24% in the last year and 65% in the last two years.
The reason for the increase in pace of growth, Stone Ridge’s ILS assets grew only half as quickly in the quarter to April 31st, will have been the considerable rate of catastrophe bond issuance and the occurrence of the key June catastrophe reinsurance renewals within the latest period of record.
The manager’s interval fund structure, the Stone Ridge Reinsurance Risk Premium Interval Fund, led the growth once again, increasing in size by 10% from around $4.5 billion at the end of April, to a new high just short of $5 billion, hitting $4.95 billion by the end of July 2017.
Once again, brisk catastrophe bond issuance helped Stone Ridge slightly increase the proportion of the interval fund’s assets made up by event-linked bonds, reaching 16.1% by the end of July.
The majority of its reinsurance interval fund assets (73.6%) are still invested in reinsurance sidecars and other collateralised reinsurance arrangements, while another 4.9% of the interval fund assets are invested in ILS funds managed by Aeolus Capital Management.
Stone Ridge’s other ILS fund, the Stone Ridge High Yield Reinsurance Risk Premium Fund, remained relatively static during the last quarter on record, growing just slightly to $1.19 billion of assets under management.
This fund clearly took advantage of the record levels of catastrophe bond issuance, to grow its cat bond assets to almost 86% of the fund’s assets, up from just 80% at the end of April.
So growth sped up in the last reported quarter for Stone Ridge Asset Management’s ILS and reinsurance linked assets, but of course the report does not include any details on recent catastrophe losses as they all fell after this quarter closed.
It’s expected that Stone Ridge will take a significant hit to its interval fund in particular, given the broad exposure to property catastrophe reinsurance and retrocession structures. The quota shares and sidecars are likely to face some level of losses in many cases and even the fund exposure via Aeolus will be exposed to recent events as well.
Additionally, Stone Ridge holds the Manatee 2016-1 catastrophe bond which is expected to be a total loss due to hurricane Irma, the FONDEN IBRD Class A notes that are expected to be a total loss due to the Mexico earthquake, as well as many of the catastrophe bonds deemed most exposed to recent events (the Galileo’s, Galilei’s, Citrus’, Blue Halo’s and Kilimanjaro’s).
Given Stone Ridge’s ILS strategy has grown so fast it now has one of the broadest portfolios of catastrophe risk, almost an index of the market, meaning it will pay significant claims following recent catastrophic events.
We may not find out the full impact of these events on Stone Ridge’s ILS funds until the end of its next quarter, although the fund has experienced around a 15% drop in value since the beginning of this year’s major hurricane activity.
How big the hit to the Stone Ridge interval fund will be remains difficult to forecast, but it is assured to be significant given the scale of the catastrophe events and associated losses.
Of course Stone Ridge could be uniquely well positioned to take advantage of any uptick in reinsurance pricing, which is already being reported.
The manager has $2 billion of assets committed to a post-event fund strategy, which is designed to help the mutual fund manager maintain its influence in reinsurance and ILS market renewals, even after a major loss has depleted capital or trapped a lot of collateral.
At this stage it’s not clear whether Stone Ridge has taken a decision to activate this post-event fund. At this time it may be too early as the manager will want to assess the size of any opportunity before mobilising more capacity into the market.
With the increased assets under management, Stone Ridge Asset Management now sits firmly in the top five insurance and reinsurance linked investment managers, by assets managed.