Ross Stevens, the CEO of Stone Ridge Asset Management, a New York based asset manager with a focus on alternative risk premia strategies including reinsurance and insurance-linked securities (ILS), has declared that right now his firm has the highest forward conviction on the reinsurance sector since its launch in 2013.
The reason for this is the significant loss activity experienced by the reinsurance industry, which has also had severe ramifications for reinsurance and insurance-linked securities (ILS) investment funds, such as the ones Stone Ridge Asset Management operates.
The investment manager still has two mutual ILS funds, the lower-risk and more catastrophe bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), as well as the higher-risk and reward, but less liquid, private ILS and quota share focused interval style mutual ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX).
In addition to these, Stone Ridge also allocates investor capital through private ILS funds and mandates, with a focus on catastrophe and non-catastrophe risks, with this segment said to be more expansive, as the mutual ILS funds have continued to shrink in the last quarter of record.
When we last reported on Stone Ridge’s mutual ILS investment funds, assets across the two strategies sat at $3.37 billion, as of July 31st 2021.
AuM across the two Stone Ridge mutual ILS funds has shrunk further in the quarter to October 31st 2021, with assets now reported at $3.08 billion, a decline of almost 9% in the three-month period.
That period will have included realising catastrophe losses for the European floods from July and Hurricane Ida at the end of August, so some of this decline is likely due to these loss events and how they have aggregated with prior period events as well, for Stone Ridge’s ILS fund strategies.
But this is what makes Stone Ridge’s founder and CEO Ross Stevens so positive on reinsurance returns going forwards, as he clearly believes the industry has reached an inflection point and sustained price improvements continue to be required.
“The recent performance challenges of the reinsurance industry make our forward conviction in our reinsurance funds the highest since firm inception,” Stevens explained.
He highlighted the rash of recent, “industry-wide investor exits,” as well as the continued, “market hardening, and the resulting rising premiums,” as factors driving his conviction in the reinsurance-linked asset class higher.
“This is a pattern that has repeated itself for decades,” Stevens said.
It’s a view held by many, that firming is likely to persist and the industry-at-large, including the traditional side, is aware of the need to more sustainably cover loss costs, cost-of-capital, expenses and deliver a return to their investors and stakeholders.
Stevens also said that, at Stone Ridge, 2021 has seen the investment manager “firing on all cylinders” and working to enhance its range of investment products, including the reinsurance segment.
Of course, much of Stone Ridge’s reinsurance activity is now less visible to us, since the launch of its Longtail Re reinsurance platform a few years ago and its more recent expansion into offering non-catastrophe risk investments.
But, on the mutual ILS fund side of things, Stone Ridge continues to see assets flow into its more catastrophe bond focused strategy, the lower-risk Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX).
This fund ended October with net assets of $1.42 billion, a new high for this strategy and up almost 2% over the last quarter of record.
Conversely, the higher-risk and reward, but less liquid, Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), continued to shrink during the last quarter.
This interval style mutual ILS fund ended October 2021 with just $1.66 billion of net assets, the smallest it has ever been and down roughly 16% in the quarter.
Some of this decline is down to catastrophe loss activity and marked down positions in the Stone Ridge interval ILS fund’s portfolio.
But, underlying this, it does seem there is a continued trend for Stone Ridge to encourage investors out of that strategy and into its private ILS fund offerings, where visibility of assets and activity is still less clear to us.
There are an increasing number of investment managers expressing constructive feelings about reinsurance returns at the moment.
As appetite grows, in-line with rising premium opportunities and pricing in a hardening market, it is to be hoped that supply and demand can be balanced out, so that inflows of capital to the space do not undermine the need to achieve risk-commensurate underwriting returns.