For the first time in the mutual insurance-linked securities (ILS) funds history, the Stone Ridge Reinsurance Risk Premium Interval Fund has seen applications for its latest quarterly share repurchase program become oversubscribed, Artemis has learned.
With the reinsurance fund being an interval and mutual fund structure, registered under the U.S. Investment Company Act, investment manager Stone Ridge Asset Management is required to offer controlled liquidity or share redemption opportunities to its investor base on a quarterly basis.
Within these quarterly repurchase opportunities, which are designed as a way to offer some liquidity to investors that allocate to what are essentially illiquid assets as many of the private ILS and collateralized reinsurance quota share investments this fund makes are, there are restrictions around the amount of liquidity that can be offered, to protect the funds operation.
At each quarterly repurchase offer, the fund offers to buy back a percentage of its shares, up to 5% of the aggregate of its issued and outstanding shares in the most recent occurrence, and the manager is very clear that the nature of this investment is illiquid in the prospectus and other information associated with it.
But should the repurchase offer be oversubscribed then the manager can either increase the amount of shares by another 2%, or repurchase shares on a pro-rate basis across all investor requests for liquidity, which we understand to have been the case here.
The latest repurchase offer closed last Friday 9th November and we’re told that on this occasion there were more requests for redemptions and liquidity than the limits allowed for.
As a result, we believe that a pro-rata repurchase of shares has been actioned, or is set to take place.
It’s the first time since the launch of the now just over $6 billion Stone Ridge Reinsurance Risk Premium Interval Fund that the redemption gate has been imposed and actually only the second time a gate has been imposed across any of the managers interval structure funds since it launched.
In this case, it’s likely a response to the impacts to the funds performance seen after the major hurricane and catastrophe losses of 2017 and now further losses due to the global catastrophe activity seen in 2018 as well.
Given the size of the fund and as a result its key role in reinsurance capital provision to major global re/insurers, it’s inevitable that it will be hit with losses from events such as hurricanes, typhoons and the recent and ongoing wildfires as well.
Of course, the Stone Ridge fund is here to pay its losses, as a key capital provider to the global insurance and reinsurance industry and while most of the investors in it likely understand that this type of asset class is one that needs to be seen as a long-term allocation, there are always going to be some for whom the prospect of any losses at all may cause them to look to redeem their shares.
For redemption requests to exceed the 5% amount on offer this quarter they would therefore have needed to exceed around $300 million, we assume based on the $6 billion fund AuM.
We’re told that investors who are redeeming their shares as part of this latest quarterly repurchase program may receive roughly one-third to a half of the redemption amounts they had requested, due to the pro-rata nature of an oversubscribed program.
That suggests the actual volume of redemption requests may have been at least double the 5% gated limit, although we cannot confirm any amount here.
Stone Ridge isn’t the only manager that has faced redemptions following recent catastrophe loss experience, of course.
We understand there have been some large investors who are set to withdraw from ILS fund strategies, although these funds likely only have a 6 month or annual liquidity window. We’re also told that other mutual ILS funds have been experiencing higher volumes of quarterly redemption requests as well, since the hurricanes of 2017.
But we’re also told that in all these cases the amount of capital looking to get into an ILS strategy consistently outstrips the amount looking to exit, suggesting that as long as investor appetite remains high these funds will not have any difficulty maintaining overall assets under management.
This is all to be expected in an asset class like ILS and reinsurance. It is not for everyone and the cycling-out of investors, for whom the asset class is perhaps not best suited, will make space for newer investors who do have the appetite to buy and hold insurance risk as an investment over the longer-term.
With over $17 billion of assets under management across its alternative risk investment strategies and over $7 billion in reinsurance and ILS, it is no surprise that from time to time Stone Ridge will see its reinsurance fund gate hit for repurchase offers.
It is perhaps surprising that this is the first time in around 20 repurchase cycles (since its launch) that the reinsurance interval fund has experienced this. But perhaps that tells you everything you need to know about just how impactful recent catastrophe loss experience has been for the ILS market.