New York based Stone Ridge Asset Management, which specialises in investments in alternative risk exposures including reinsurance and insurance-linked securities (ILS), has increased its allocations to collateralized reinsurance and sidecars.
Stone Ridge was predominantly invested in a broad range of catastrophe bonds, with just a few sidecar quota shares, when the firm launched its first two reinsurance linked investment funds, the Stone Ridge Reinsurance Risk Premium Fund and the Stone Ridge High Yield Reinsurance Risk Premium Fund, at the end of 2012.
Stone Ridge then launched a new investment strategy, the Stone Ridge Reinsurance Risk Premium Interval Fund, which has a mandate to invest in more illiquid investments, while still offering investors access to regular liquidity opportunities, towards the end of 2013.
The more illiquid mandate means the Interval fund can contain more exposure to sidecars, quota shares and collateralized reinsurance contracts shares than the other two Stone Ridge ILS funds. The first opportunity to see just how Stone Ridge has invested the Interval fund, and how that differs to its other two ILS funds, emerged with the publication of quarterly portfolio holdings reports published earlier this week.
The holdings make for interesting reading. Being mutual fund’s, the Stone Ridge reinsurance linked investment funds have to report the assets they are invested in on a quarterly basis, giving an insight into the way the investment manager has diversified its portfolio of insurance linked assets.
The report also shows the different insurance linked investment strategies that Stone Ridge offers to its clients and what really stands out is the difference in the Interval fund portfolio compared to its other two funds.
Stone Ridge’s Reinsurance Risk Premium Fund has $477.8m or 76.1% of its assets invested in catastrophe bonds, $114.1m or 18.2% invested in quota share participation notes and $2.5m or 0.4% in quota share preference shares. With another $16.9m (2.7%) invested in U.S. money market funds, the Reinsurance Risk Premium Fund had total assets of just over $611.4m at the end of the quarter.
Stone Ridge’s High Yield Reinsurance Risk Premium Fund has $188m or 76.9% invested in catastrophe bonds, $48.4m or 19.8% invested in quota share participation notes, $0.8m or 0.3% invested in quota share preference shares and $5.7m or 2.3% held in money market funds. That gives the High Yield fund total assets of $242.9m.
The Stone Ridge Reinsurance Risk Premium Interval Fund is where this gets really interesting. The Interval fund has only $11.1m or 1.8% invested in catastrophe bonds at this time. $16.4m or 2.7% is invested in quota share participation notes. Interestingly, the Interval fund also invests $12.6m or 2.1% in the Aeolus Property Catastrophe Keystone Fund, which is a higher return strategy in the ILS market. However the bulk of this fund, $447.7m or 73.9% is invested in a range of sidecars and segregated cell vehicles through quota share preference shares.
The quota share investments for the Reinsurance Risk Premium and High Yield Reinsurance Risk Premium fund’s are investments in well-known sidecars such as Munich Re’s Eden Re Ltd, SCOR’s Atlas Re X Ltd. and Swiss Re’s Sector Re V Ltd. and Partner Re’s Lorenz Re.
For the Interval fund the quota shares are a lot more diverse, but also include sidecar investments in Munich Re’s Eden Re and Aspen’s Silverton Re vehicle. Then it gets even more diverse as the reported investments moves into a range of segregated account vehicles, mostly managed by Kane’s Segregated Accounts Company, which may be Stone Ridge directly transacting collateralized reinsurance with cedents or participating in the collateralization of quota share reinsurance contracts.
Other investments of note in Stone Ridge’s Interval fund include ACE’s Altair Re II sidecar, a segregated cell operated by Axis Re Ventures, the third-party capital unit of Axis Capital, and three investments in Argo’s Mt. Logan Re sidecar totalling $100m alone.
If you begin to total up the investments in sidecars we know about, our list of recent sidecars can be found here, it shows the scale of the investments Stone Ridge has made in these vehicles.
Across the three Stone Ridge reinsurance linked investment funds, the firm has invested $40.4m in SCOR’s Atlas Re X sidecar, $12.6m in Munich Re’s Eden Re Ltd, $115.9m in Swiss Re’s Sector Re V Ltd., $3.4m in PartnerRe’s Lorenz Re, $10.1m in Aspen’s Silverton Re, $15m in ACE’s Altair Re II, $50.6m in Axis Re Ventures Cell 0001 (not necessarily a sidecar but large enough to mention) and finally $100.6m in Everest Re’s Mt. Logan Re sidecar.
Finally, the observant readers will have noticed that the percentages cited above for the Interval funds investments do not come close to 100%. That’s because the Stone Ridge Reinsurance Risk Premium Interval Fund still has just over $119m or 19.7% invested in money market funds.
That suggests that Stone Ridge has not yet managed to invest all of the $606m or so that it raised for this fund, which is no real surprise as in the current market environment that is a significant amount of capital to deploy. Of course the fact that this is an Interval fund, so offers investors regular, scheduled liquidity opportunities will also mean that it will keep more cash or equivalent assets on hand to allow it to meet liquidity needs of its investors.
Looking at the diverse range of investments in the Stone Ridge Interval fund suggests that it could achieve a very attractive return for its investors if the quota shares and sidecars remained largely loss free. It will be very interesting to watch the results come in for the fund when they are reported as it could achieve a return well into double figures, which at this time will be very attractive for the sector.
In total, again across the three Stone Ridge ILS funds, the firm has about $677m of catastrophe bonds and $630m in sidecars and quota shares reinsurance contracts. Stone Ridge Asset Management’s total insurance linked assets under management amounted to just over $1.46 billion at the end of Q1.
The charts below show the investment split, at the time of reporting these holdings, for each of the Stone Ridge Asset Management ILS and reinsurance linked investment funds. The difference in the Interval fund is clear to see, as is the fact that the asset allocations are fairly consistent across the other two ILS funds.