Stone Ridge made well over $1bn in reinsurance trading profits in 2023: CEO Stevens

Stone Ridge Asset Management, the New York based asset manager with an alternative risk premia focus, made well over $1 billion in reinsurance trading profits over the course of 2023, with record returns delivered to investors by both of its mutual insurance-linked securities (ILS) fund strategies, according to CEO Ross Stevens.

The two Stone Ridge mutual ILS and reinsurance focused funds have delivered clear signals on the profitability of reinsurance-linked investments over the last year.

Stone Ridge’s flagship Reinsurance Risk Premium Interval Fund, that invests across the spectrum of ILS and reinsurance-linked assets with a particular focus on sidecars and private quota shares, as well as other collateralized reinsurance arrangements and to a lesser degree catastrophe bonds, is up by approximately 45% for calendar year 2023.

Stone Ridge’s High Yield Reinsurance Risk Premium Fund, which is a more catastrophe bond focused investment strategy, is up by 21%.

In his latest investor letter, Ross Stevens, the Stone Ridge Asset Management Founder and CEO, delivers insights on the reinsurance strategy and explains why his firm seeks to partner with the reinsurance market, rather than directly compete.

Stevens explains, “At Stone Ridge, we don’t dare underwrite. We underwrite the underwriters. Our foundational approach is to partner, not compete, with the best underwriters in the world.

“With deliberate practice, high cadence connectivity, and internal private scorecards that matter deeply to us, we seek to earn and re-earn the right to be the most strategic risk-sharing partner to each of our cherished underwriting partners.

“Among many reasons for our invented business model, we view information asymmetry – e.g., the value of our partners’ proprietary data – as competitively un-overcomeable.”

That partnership approach and the stability of capital offered to those reinsurance partners, has made Stone Ridge highly-valued and sought after, when it comes to quota share arrangements in particular.

Stevens also highlights why reinsurance is difficult and why data is so important in this market.

“One hundred years ago, Munich Re and Swiss Re were the two largest reinsurers. Today, Munich Re and Swiss Re are the two largest reinsurers. The third largest, Hannover Re, self-identifies as the “new kid on the block” having started a mere 57 years ago.

“Reinsurance is (very) hard. Given this level of leadership longevity, form your own view as to the importance of proprietary data,” Stevens wrote.

But the asset manager is selective as well and using its data-first approach to partner selection has helped Stone Ridge take on exposure to many of the world’s premier reinsurance portfolios.

The approach is clearly working as well, as Stone Ridge has had the strongest year in its history in reinsurance and ILS this year.

Clearly, the hardened reinsurance market has helped drive the elevated level of returns, as too has the steep rise in catastrophe bond spreads.

But, underpinning much of the profits earned on the reinsurance investments side will also be dramatic improvements in terms and conditions, that should see the Stone Ridge strategies far better insulated when the market does face a major catastrophe loss again and will likely have lifted it above some of the frequency loss events 2023 has been characterised by (such as many of the US severe convective storm losses).

All of which has helped to make 2023 a very profitable year for the firm and its end-investors.

Stevens explained, “Overall, Stone Ridge made well over $1 billion in reinsurance trading profits this year, on $1.7 billion of catastrophe premium, making Stone Ridge equivalent to about the fourth or fifth largest catastrophe risk bearing “reinsurer” in the world.

“This “ranking” on premium was pointed out to us about a week ago, but you cannot eat premium. We’re focused on the profits.”

It’s a phenomenal result for 2023, further driving home the attractiveness of reinsurance linked investing and how instruments from catastrophe bonds to quota shares can enable investors to benefit from what is perhaps one of the least correlated asset classes around.