Stone Ridge raising capital for new Longtail reinsurance platform

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Stone Ridge Asset Management, the New York based manager of reinsurance focused insurance-linked securities (ILS) mutual fund strategies, is beginning the process of raising capital for a new reinsurance platform named Longtail, we can report.

Already a significant manager of ILS and reinsurance linked assets, ranging from catastrophe bonds, to private quota shares, investments in sidecars and other collateralised reinsurance structures, Stone Ridge appears to be establishing its own reinsurer and a platform that could allow it to access risk more directly, without the need for any fronting.

Longtail Insurance Holdings Ltd. and a reinsurer Longtail Re Ltd. have both been established in Bermuda by Stone Ridge Asset Management and the company has begun the process of raising up to $500 million to capitalise the reinsurance platform, we’ve learned.

Having been hit hard by the consecutive years of major catastrophe losses, it is no surprise Stone Ridge would look to develop its own access to the reinsurance market’s renewal cycle by registering a reinsurer and the facilities to allow it to engage directly with ceding companies.

Such a platform can only help to reduce the risk of collateral being trapped, remove any reliance on fronting service providers and also get the investment manager closer to the source of the risk at lower cost, ultimately providing cleaner and more efficient reinsurance returns for its mutual ILS funds and their investors.

Stone Ridge has launched a private placement capital raise for Longtail Insurance Holdings Ltd., which we understand to be the holding operation for the reinsurance platform.

The capital raise is targeting up to $500 million through an equity offering, which we assume would be put to work in underwriting reinsurance contracts through the registered Longtail Re Ltd. reinsurer.

At this time we do not know the strategy behind the launch of Longtail Re, whether (as the name implies) it is going to be looking to underwrite a longer-tailed set of risks, perhaps with a more total-return type strategy.

Or, and we feel this is more likely, whether it could be the launch of what may become a rated reinsurance vehicle to underwrite on behalf of the existing Stone Ridge mutual ILS funds and the naming is after the Bermuda Longtail, a type of bird commonly found on the island.

Whichever it turns out to be, or another hybrid approach, it’s certain to add efficiency to the way Stone Ridge secures reinsurance linked returns for its investor base and allow the manager to play a much more similar role to traditional reinsurance players, while channelling returns to investors.

Given the challenges asset managers can face with trapped collateral, as well as the multiple layers of fees paid through quota shares and sidecars, it would make a lot of sense for Stone Ridge to be ramping up its ambitions to own a reinsurance vehicle, perhaps rated, that can help it reduce the drag on returns from collateral issues as well as gain more efficient access to risk.

As a piece of infrastructure to help Stone Ridge access the market more efficiently and deliver enhanced returns, the launch of Longtail Insurance and Longtail Re is an obvious next step for the asset manager.

We will update you as and when more information comes to light.