Purchase of Re-insurance risk outside of re-insurance funds

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packer16
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Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sat Apr 06, 2019 8:10 am

One the contentions for buying a re-insurance fund is you get pure re-insurance risk, which is true but you can also buy this exposure via insurance companies. If you buy for example Lancashre Re or WR Berkley you are buying a combination of bond risk & re-insurance risk. The re-insurance risk comes from the re-insurance & the bond risk from its short duration investment grade bond portfolios. As noted in previous threads, there is a statement that re-insurance firms have equity risk which on average may be true but if you are buying re-insurers that have an overwhelming majority of its assets in bonds the equity risk should be nominal. If you look at the performance of the above re-insurers in 2008 you can see that when the equity risk showed up, it did not effect these stocks. You need to look at the specifics of the re-insurers versus top level data to get an understanding of these companies.

The liquidity advantage of stocks vs. interval funds cannot be overlooked also. In times of distress, when you would want to re-allocate to more risk assets would be difficult in a interval fund structure to redeem a large amount when others also want to do this but with a stock you can do this very quickly. As I have mentioned before, you also have a cost advantage to going direct via an insurer vs. a fund & the long-term returns bear this out.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by matto » Sat Apr 06, 2019 12:51 pm

packer16 wrote:
Sat Apr 06, 2019 8:10 am
One the contentions for buying a re-insurance fund is you get pure re-insurance risk, which is true but you can also buy this exposure via insurance companies. If you buy for example Lancashre Re or WR Berkley you are buying a combination of bond risk & re-insurance risk. The re-insurance risk comes from the re-insurance & the bond risk from its short duration investment grade bond portfolios. As noted in previous threads, there is a statement that re-insurance firms have equity risk which on average may be true but if you are buying re-insurers that have an overwhelming majority of its assets in bonds the equity risk should be nominal. If you look at the performance of the above re-insurers in 2008 you can see that when the equity risk showed up, it did not effect these stocks. You need to look at the specifics of the re-insurers versus top level data to get an understanding of these companies.

The liquidity advantage of stocks vs. interval funds cannot be overlooked also. In times of distress, when you would want to re-allocate to more risk assets would be difficult in a interval fund structure to redeem a large amount when others also want to do this but with a stock you can do this very quickly. As I have mentioned before, you also have a cost advantage to going direct via an insurer vs. a fund & the long-term returns bear this out.

Packer
I don't think it matters what the insurance company's balance sheet is. We all hold diversified equity bond portfolios, what's the harm in holding a touch more? The management expenses on the balance sheet are probably relatively low.

I think ideally for diversification purposes the reinsurance would best be non financial. By that I mean, ideally you'd want to insure events like floods or hurricanes. That's the real diversification worry: you don't want to be holding AIG. This is probably harder to know a priori than people think.

One issue with buying the reinsurance companies directly might be you are probably paying a premium for the future contracts they haven't yet written. If the total reinsurance needs go down, reinsurance companies will face reinvestment risk.

A question: do reinsurance funds buy the book of the reinsurer at book value? I.e., when you invest in a reinsurance fund are you getting a p/b of 1, vs the p/b of 2 for something like WRB? My accounting is relatively weak so apologies if that's a dumb question.

If so, and if the reinsurer is forced to sell a slice of the entire book (no picking and choosing), that effectively means the reinsurance companies are becoming more about the sourcing/writing the contracts rather than having a balance sheet, correct?

Finally, isn't investment of float a pretty large portion of the returns for insurance companies? How does this work for reinsurance funds.

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by stlutz » Sat Apr 06, 2019 3:12 pm

packer16 wrote:
Sat Apr 06, 2019 8:10 am
If you look at the performance of the above re-insurers in 2008 you can see that when the equity risk showed up, it did not effect these stocks.
I would look a little more closely. Taking a look a a price-only chart, WRB peaked at ~$40/sh. in 2006. In Oct. 2008 it had declined to around $20. By year end 2018, it had jumped back up to $30 (hence giving it that slightly positive return for the calendar year). By March, 2009, it was back down around $20 again.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sat Apr 06, 2019 3:56 pm

You must be looking at a different security. WR Berkley, symbol WRB, opened 2008 at $24.42 & closed at $25.62 per Yahoo and according to Morningstar had a total return for 2008 was 5.9% including dividends. The closing price Dec 2018 was $73.78. Maybe you are looking at one of the preferred stock prices.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sat Apr 06, 2019 6:40 pm

IMO the balance sheet matters if you are looking for an equity diversifier. I agree since we have balanced portfolios to begin with this will probably not have a material effect. Also most insurance companies are required by regulators to have large amounts of fixed income on their balance sheets to pay claims. What is interesting with insurers is it is similar to a leveraged balanced fund (with a high allocation to fixed income) financed with low cost funds as long a the underwriting is good.

I agree that there could be an issue if you are underwriting insurance on financial institution risk. IMO via disclosures I think you can figure out where this may be an issue.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by larryswedroe » Mon Apr 08, 2019 3:05 pm

To be helpful, re reinsurance stocks. Here are some issues that should be considered. They are why we have chosen to use a pure investment in reinsurance risk. Others may come to different conclusions. But the issues should be considered.

In general, as packer noted, reinsurance stocks do have a significant beta to the equity markets, despite having significant exposure to property catastrophe and bonds.And even if don't own equities in portfolio this is true because because investing in the equity of reinsurer involves taking a leveraged position in the future growth and profitability of the business. Investing in insurance-linked securities isolates only the risk related to premiums and losses. As to Lancashire, even though they are a property catastrophe specialist with virtually no investments in stocks they do have a fair amount of credit risk, with 37% of their investment portfolio in corporates and bank loans--that's equity like risk. Had someone check and told me it showed beta of about .6 over three years. The difference between a beta of 0.6 and a beta of roughly zero is significant. The other company, WR Berkeley is not a reinsurer but a primary insurer.

There is not necessarily a cost advantage of investing directly in reinsurance stock vs investing through a fund. With quota share investments, investors share in the economics of the individual reinsurance contracts, and reimburses the reinsurers for their operating expenses through a fee called a “ceding commission.” To do a proper comparison, you need to compare the ceding commission plus fund fees/expenses to the total operating expenses of the reinsurer.

Reinsurers have lines of business other than property catastrophe that they write at a small or negative underwriting profit, expecting to make money on the investment side (they are writing this business to generate low-cost “float”). In fact, property catastrophe business has been considered one of the most profitable lines of business for many global reinsurers—and has been thought to subsidize some of the poorer ROE lines of business. Additionally, by investing in an equity, you take all the risk associated with an operating company – strategic risk, operational risk, reputational risk. For example, Lancashire traded off over 14% in the 25 trading days following the announcement of their CEO’s retirement in April 2014. There is also the risk that some relatively unknown, “small” part of the business takes down the whole enterprise (think AIG during the financial crisis, where the losses didn’t come from the visible fixed income portfolio). None of these are meaningful risks for a fund.

Hope the above is helpful

Best wishes
Larry

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by klaus14 » Fri Nov 29, 2019 3:34 pm

larryswedroe wrote:
Mon Apr 08, 2019 3:05 pm
To be helpful, re reinsurance stocks. Here are some issues that should be considered. They are why we have chosen to use a pure investment in reinsurance risk. Others may come to different conclusions. But the issues should be considered.

In general, as packer noted, reinsurance stocks do have a significant beta to the equity markets, despite having significant exposure to property catastrophe and bonds.And even if don't own equities in portfolio this is true because because investing in the equity of reinsurer involves taking a leveraged position in the future growth and profitability of the business. Investing in insurance-linked securities isolates only the risk related to premiums and losses. As to Lancashire, even though they are a property catastrophe specialist with virtually no investments in stocks they do have a fair amount of credit risk, with 37% of their investment portfolio in corporates and bank loans--that's equity like risk. Had someone check and told me it showed beta of about .6 over three years. The difference between a beta of 0.6 and a beta of roughly zero is significant. The other company, WR Berkeley is not a reinsurer but a primary insurer.

There is not necessarily a cost advantage of investing directly in reinsurance stock vs investing through a fund. With quota share investments, investors share in the economics of the individual reinsurance contracts, and reimburses the reinsurers for their operating expenses through a fee called a “ceding commission.” To do a proper comparison, you need to compare the ceding commission plus fund fees/expenses to the total operating expenses of the reinsurer.

Reinsurers have lines of business other than property catastrophe that they write at a small or negative underwriting profit, expecting to make money on the investment side (they are writing this business to generate low-cost “float”). In fact, property catastrophe business has been considered one of the most profitable lines of business for many global reinsurers—and has been thought to subsidize some of the poorer ROE lines of business. Additionally, by investing in an equity, you take all the risk associated with an operating company – strategic risk, operational risk, reputational risk. For example, Lancashire traded off over 14% in the 25 trading days following the announcement of their CEO’s retirement in April 2014. There is also the risk that some relatively unknown, “small” part of the business takes down the whole enterprise (think AIG during the financial crisis, where the losses didn’t come from the visible fixed income portfolio). None of these are meaningful risks for a fund.

Hope the above is helpful

Best wishes
Larry
I am wondering if there is still a case for overweighting reinsurance stocks. i get that they are not as efficient as reinsurance funds, but reinsurance funds are not accessible for most of us.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Fri Nov 29, 2019 4:08 pm

I am not sure if re-insurance stocks are more or less efficient than funds but the performance difference is quite large. The trailing 5-yr performance for both LancashireRe & WR Berkley are 11% and 18% annually, respectively. The return to SRRIX is -1.9% annually per Seeking Alpha. So there appears to be quite a difference in the economic performance of the fund and these traded sources of re-insurance risk. For a reference, BRK and MKL's 5-yr trailing performance has been 8.9% and 11.5%, annually respectively.

The one note about beta is the r2 of beta for most non-index stocks is very small so I am not sure how much I would rely upon it. Also, this fund has withdrawal restrictions so your actual return may be less by the time you sell your stake in the fund.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Fri Nov 29, 2019 10:13 pm

matto wrote:
Sat Apr 06, 2019 12:51 pm

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.
This is a concern that I would have concerning the Stone Ridge Reinsurance Fund. You wonder if the big players are taking advantage of the retail investors, sort of like taking candy away from a baby. Does Stone Ridge have access to the better deals or are they getting leftovers? Another concern would be expertise. All kinds of folks who exude confidence and think they know what they are doing. Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by Dale_G » Sat Nov 30, 2019 1:11 am

nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
... clip ...
Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
And who are you going to ask nedsaid?

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sat Nov 30, 2019 9:28 am

Dale_G wrote:
Sat Nov 30, 2019 1:11 am
nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
... clip ...
Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
And who are you going to ask nedsaid?

Dale
Were I a client of a firm advocating for these, I would start with the Advisor. In Buckingham's case, Larry Swedroe is available for any of us to ask. One could also start a thread here and ask if anyone here works for a hedge fund or works in the reinsurance industry. There are some ways to get at this. You could also look at the portfolio managers and see if you can get biographical information on them.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by jwhitaker » Sat Nov 30, 2019 9:39 am

nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
matto wrote:
Sat Apr 06, 2019 12:51 pm

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.
This is a concern that I would have concerning the Stone Ridge Reinsurance Fund. You wonder if the big players are taking advantage of the retail investors, sort of like taking candy away from a baby. Does Stone Ridge have access to the better deals or are they getting leftovers? Another concern would be expertise. All kinds of folks who exude confidence and think they know what they are doing. Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
I work in reinsurance so I have some insight. I'm sure Stone Ridge has great minds, but you are on to something with the dynamics of the reinsurance market. Reinsurance deals are syndicated, but the preferred terms go to the big players, i.e. portfolios only available to you through that reinsurer's stock. I looked at the list of deals underlying a Stone Ridge fund once. It is all property catastrophe, so it holds up to the theory of weak market correlation. But the average "share" of deals they were on was probably less than 1%, maybe even much less. If you were a buyer of reinsurance, how hard would you work to get someone to sign up for a 0.4% share of your contract? Not very is the answer, and as a result funds like these may be getting terms less favorable to them than larger reinsurers. Also, if I am buying reinsurance and I need to even waste my time with someone who is giving 0.5% capacity, it must mean that the big players don't want it all, i.e. I am having difficulty completing the placement, i.e. terms are not great for the reinsurer. So you are right, the average quality (pricing, terms, etc.) of deals you get in the fund is probably lower than the market average. Problem is you cannot access the market average without also assuming equity risk from big reinsurers.

Side note, most reinsurers in their desire to grow top-line now have substantial direct insurance, investment, venture capital and other sources of income (and risk). So you can't really even get a pure reinsurance equity stake.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sat Nov 30, 2019 9:51 am

jwhitaker wrote:
Sat Nov 30, 2019 9:39 am
nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
matto wrote:
Sat Apr 06, 2019 12:51 pm

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.
This is a concern that I would have concerning the Stone Ridge Reinsurance Fund. You wonder if the big players are taking advantage of the retail investors, sort of like taking candy away from a baby. Does Stone Ridge have access to the better deals or are they getting leftovers? Another concern would be expertise. All kinds of folks who exude confidence and think they know what they are doing. Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
I work in reinsurance so I have some insight. I'm sure Stone Ridge has great minds, but you are on to something with the dynamics of the reinsurance market. Reinsurance deals are syndicated, but the preferred terms go to the big players, i.e. portfolios only available to you through that reinsurer's stock. I looked at the list of deals underlying a Stone Ridge fund once. It is all property catastrophe, so it holds up to the theory of weak market correlation. But the average "share" of deals they were on was probably less than 1%, maybe even much less. If you were a buyer of reinsurance, how hard would you work to get someone to sign up for a 0.4% share of your contract? Not very is the answer, and as a result funds like these may be getting terms less favorable to them than larger reinsurers. Also, if I am buying reinsurance and I need to even waste my time with someone who is giving 0.5% capacity, it must mean that the big players don't want it all, i.e. I am having difficulty completing the placement, i.e. terms are not great for the reinsurer. So you are right, the average quality (pricing, terms, etc.) of deals you get in the fund is probably lower than the market average. Problem is you cannot access the market average without also assuming equity risk from big reinsurers.

Side note, most reinsurers in their desire to grow top-line now have substantial direct insurance, investment, venture capital and other sources of income (and risk). So you can't really even get a pure reinsurance equity stake.
Thank you. As the good book says, "Ask and ye shall receive." Yep, this is in alignment with my suspicions. The second question to ask is if Stone Ridge doesn't have access to the best deals, are the deals that it is getting still good enough for the retail investor? In other words, a retail investor might not get the returns that Warren Buffett gets but can such an investor still achieve equity-like returns with low correlation to the stock market? My suspicion is that the answer is "maybe."

Your comments also throw some cold water on Packer16's thesis that what you need to do is buy stock in the reinsurers. Berkshire-Hathaway is the perfect example of what you are talking about. Going from memory, they own General Reinsurance but also own Geico (and the Gekko). Reinsurance and Direct. B-H is not a pure play to say the least.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by jwhitaker » Sat Nov 30, 2019 10:24 am

nedsaid wrote:
Sat Nov 30, 2019 9:51 am
jwhitaker wrote:
Sat Nov 30, 2019 9:39 am
nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
matto wrote:
Sat Apr 06, 2019 12:51 pm

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.
This is a concern that I would have concerning the Stone Ridge Reinsurance Fund. You wonder if the big players are taking advantage of the retail investors, sort of like taking candy away from a baby. Does Stone Ridge have access to the better deals or are they getting leftovers? Another concern would be expertise. All kinds of folks who exude confidence and think they know what they are doing. Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
I work in reinsurance so I have some insight. I'm sure Stone Ridge has great minds, but you are on to something with the dynamics of the reinsurance market. Reinsurance deals are syndicated, but the preferred terms go to the big players, i.e. portfolios only available to you through that reinsurer's stock. I looked at the list of deals underlying a Stone Ridge fund once. It is all property catastrophe, so it holds up to the theory of weak market correlation. But the average "share" of deals they were on was probably less than 1%, maybe even much less. If you were a buyer of reinsurance, how hard would you work to get someone to sign up for a 0.4% share of your contract? Not very is the answer, and as a result funds like these may be getting terms less favorable to them than larger reinsurers. Also, if I am buying reinsurance and I need to even waste my time with someone who is giving 0.5% capacity, it must mean that the big players don't want it all, i.e. I am having difficulty completing the placement, i.e. terms are not great for the reinsurer. So you are right, the average quality (pricing, terms, etc.) of deals you get in the fund is probably lower than the market average. Problem is you cannot access the market average without also assuming equity risk from big reinsurers.

Side note, most reinsurers in their desire to grow top-line now have substantial direct insurance, investment, venture capital and other sources of income (and risk). So you can't really even get a pure reinsurance equity stake.
Thank you. As the good book says, "Ask and ye shall receive." Yep, this is in alignment with my suspicions. The second question to ask is if Stone Ridge doesn't have access to the best deals, are the deals that it is getting still good enough for the retail investor? In other words, a retail investor might not get the returns that Warren Buffett gets but can such an investor still achieve equity-like returns with low correlation to the stock market? My suspicion is that the answer is "maybe."

Your comments also throw some cold water on Packer16's thesis that what you need to do is buy stock in the reinsurers. Berkshire-Hathaway is the perfect example of what you are talking about. Going from memory, they own General Reinsurance but also own Geico (and the Gekko). Reinsurance and Direct. B-H is not a pure play to say the least.
Really hard to say if they are good enough for the retail investor. It's not like all of these deals over here are a 10% return, and these others are only 9%. It's very difficult to value a deal. For example in 2016 wildfire was basically not on the radar, at least not most people's. Then boom, huge losses. It's like the subprime crisis on AAA mortgage backed securities. That outcome was not even contemplated in the original 9% return. Flood is another one. Then another 9/11 will happen, then a huge earthquake where some totally new kind of loss emerges that no one thought of. Anyway, what could have happened is something like big reinsurers see a little earlier that wildfire is an issue, and gets off all the California stuff. The fund, which has different incentives because they are offloading the risk, maybe stays on or even increases exposure. On the flip side it could be that the fund which is transactional dumps it all right away, and the large reinsurer "values it clients" and rides the wave of losses.

Look up Markel CatCo, there was kind of a scandal with this private investment vehicle, you'd find it interesting.

I guess my feeling on reinsurance is that it is more bond-like than equity like. Your upside is just the premium, but your downside is the full limit which may be 10x or even 100x the premium. There are many on this forum that argue against holding even high quality non US government bonds, so I can't imagine they love reinsurance.

Another thing people don't think about is the world is finite. It is hard to truly diversify a cat bond portfolio. There are hurricanes in Florida, earthquakes in California. Sure there is some small amount of tornado risk in Australia someone wants a Cat bond for, but since it is diversifying, it will be gobbled up by institutions before it gets to investors. Capital markets are there to extend the capital available for the peak risks in the globe.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sat Nov 30, 2019 10:49 am

jwhitaker wrote:
Sat Nov 30, 2019 10:24 am
nedsaid wrote:
Sat Nov 30, 2019 9:51 am
jwhitaker wrote:
Sat Nov 30, 2019 9:39 am
nedsaid wrote:
Fri Nov 29, 2019 10:13 pm
matto wrote:
Sat Apr 06, 2019 12:51 pm

A meta concern: I work in a hedge fund, so I look around and see a gigantic glut of capital. It's really mind blowing how much money is out there looking to invest in literally anything. So why on earth would I ever buy into a reinsurance fund that would accept someone like me (retail) as an investor? There is a ton of institutional money which makes me worry that retail investors have missed the boat or are buying things other people don't want.
This is a concern that I would have concerning the Stone Ridge Reinsurance Fund. You wonder if the big players are taking advantage of the retail investors, sort of like taking candy away from a baby. Does Stone Ridge have access to the better deals or are they getting leftovers? Another concern would be expertise. All kinds of folks who exude confidence and think they know what they are doing. Big difference between knowing what you are doing and only thinking that you know what you are doing. Hopefully Stoneridge has some of the best minds in the business. Those are questions that I would ask.
I work in reinsurance so I have some insight. I'm sure Stone Ridge has great minds, but you are on to something with the dynamics of the reinsurance market. Reinsurance deals are syndicated, but the preferred terms go to the big players, i.e. portfolios only available to you through that reinsurer's stock. I looked at the list of deals underlying a Stone Ridge fund once. It is all property catastrophe, so it holds up to the theory of weak market correlation. But the average "share" of deals they were on was probably less than 1%, maybe even much less. If you were a buyer of reinsurance, how hard would you work to get someone to sign up for a 0.4% share of your contract? Not very is the answer, and as a result funds like these may be getting terms less favorable to them than larger reinsurers. Also, if I am buying reinsurance and I need to even waste my time with someone who is giving 0.5% capacity, it must mean that the big players don't want it all, i.e. I am having difficulty completing the placement, i.e. terms are not great for the reinsurer. So you are right, the average quality (pricing, terms, etc.) of deals you get in the fund is probably lower than the market average. Problem is you cannot access the market average without also assuming equity risk from big reinsurers.

Side note, most reinsurers in their desire to grow top-line now have substantial direct insurance, investment, venture capital and other sources of income (and risk). So you can't really even get a pure reinsurance equity stake.
Thank you. As the good book says, "Ask and ye shall receive." Yep, this is in alignment with my suspicions. The second question to ask is if Stone Ridge doesn't have access to the best deals, are the deals that it is getting still good enough for the retail investor? In other words, a retail investor might not get the returns that Warren Buffett gets but can such an investor still achieve equity-like returns with low correlation to the stock market? My suspicion is that the answer is "maybe."

Your comments also throw some cold water on Packer16's thesis that what you need to do is buy stock in the reinsurers. Berkshire-Hathaway is the perfect example of what you are talking about. Going from memory, they own General Reinsurance but also own Geico (and the Gekko). Reinsurance and Direct. B-H is not a pure play to say the least.
Really hard to say if they are good enough for the retail investor. It's not like all of these deals over here are a 10% return, and these others are only 9%. It's very difficult to value a deal. For example in 2016 wildfire was basically not on the radar, at least not most people's. Then boom, huge losses. It's like the subprime crisis on AAA mortgage backed securities. That outcome was not even contemplated in the original 9% return. Flood is another one. Then another 9/11 will happen, then a huge earthquake where some totally new kind of loss emerges that no one thought of. Anyway, what could have happened is something like big reinsurers see a little earlier that wildfire is an issue, and gets off all the California stuff. The fund, which has different incentives because they are offloading the risk, maybe stays on or even increases exposure. On the flip side it could be that the fund which is transactional dumps it all right away, and the large reinsurer "values it clients" and rides the wave of losses.

Look up Markel CatCo, there was kind of a scandal with this private investment vehicle, you'd find it interesting.

I guess my feeling on reinsurance is that it is more bond-like than equity like. Your upside is just the premium, but your downside is the full limit which may be 10x or even 100x the premium. There are many on this forum that argue against holding even high quality non US government bonds, so I can't imagine they love reinsurance.

Another thing people don't think about is the world is finite. It is hard to truly diversify a cat bond portfolio. There are hurricanes in Florida, earthquakes in California. Sure there is some small amount of tornado risk in Australia someone wants a Cat bond for, but since it is diversifying, it will be gobbled up by institutions before it gets to investors. Capital markets are there to extend the capital available for the peak risks in the globe.
Thank you. This was very enlightening.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sat Nov 30, 2019 1:53 pm

The amount of exposure to re-insurance risk dependent upon the re-insurer/insurer you buy. If you buy an re-insurance index, you will get exposure to other risk factors which maybe difficult to determine exactly. However, you can limit your holds to those firms who hold primarily bonds & get a nice diversification combo of bonds & re-insurance risk, like LancashireRe and WR Berkley. The combo of bonds and re-insurance risk should be good diversifies of equity risk.

What I have hard time with is claims of equity risk when the underlying assets of a re-insurer are bonds. This would imply that there is difference between the underlying economics of the business and how the equity is trading. If the market is efficient (which I think most agree with here) then this is a mispricing which I would think would be corrected quickly. One caution about beta is to look at the r2 of the beta. In cases of some stocks, the r2 is pretty small so relying on beta as indicator of equity risk can be tenuous if the r2 is low.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sat Nov 30, 2019 9:57 pm

I raised some questions and I remember that Larry Swedroe has addressed my concerns about the Stone Ridge Re-Insurance fund. I wondered if SRRIX was getting the leftovers after the large reinsurers had gotten the best deals. What happens is that SSRIX buys pro-rata shares of other insurers businesses, he refers to these as Quota Shares. I also had concerns about the experience of the people running the fund. Larry says that many of the managers have had senior experience at other reinsurance firms. I also had concerns about the market for reinsurance becoming crowded, Larry said that yes the amount of capital coming in are increasing but with increased middle class in China and India that demand will also rise. I also discussed skepticism about the fund eliminating beta risk, Larry cited 2008 when reinsurance stocks fell 20% and yet the actual reinsurance industry did well that year. Finally, the illiquidity premium comes from SRRIX owning Quota Shares which are illiquid and not from CAT Bonds which are liquid. Big reason that the fund is in an Interval Fund format.

It is clear from Larry's comments that SRRIX purchases mostly Quota Shares and has a small part of its assets in Catastrophe Bonds. I enclosed definitions of these terms from Investopedia to aid in understanding. So I will search and find what he has said in the past:

From Investopedia:
What Is a Catastrophe Bond – CAT?
A catastrophe bond (CAT) is a high-yield debt instrument designed to raise money for companies in the insurance industry in the event of a devastating natural disaster. A CAT bond allows the issuer to receive funding from the bond only if specific conditions occur such as an earthquake or tornado. However, if the special event protected by the bond triggers the payout to the insurance company, the obligation to pay interest and repay the principal is either deferred or completely forgiven.

CAT bonds have short maturities not exceeding three to five years. The primary investors in these securities are hedge funds, pension funds, and other institutional investors.

https://www.investopedia.com/terms/c/ca ... hebond.asp

What Is a Quota Share Treaty?
A quota share treaty is a pro-rata reinsurance contract in which the insurer and reinsurer share premiums and losses according to a fixed percentage.

Quota share reinsurance allows an insurer to retain some risk and premium while sharing the rest with an insurer up to a predetermined maximum coverage. Overall, it's a way for an insurer to boost and preserve some of its capital.

https://www.investopedia.com/terms/q/qu ... treaty.asp

I also found this definition at irmi.com:

Quota Share Reinsurance — a form of reinsurance in which the ceding insurer cedes an agreed-on percentage of every risk it insures that falls within a class or classes of business subject to a reinsurance treaty.

by larryswedroe » Thu Nov 28, 2019 2:49 pm
Note you don't see Berkshire exiting reinsurance, they are growing their assets, the very same assets SRRIX buys.
by larryswedroe » Fri Sep 27, 2019 11:02 am
For example, only a very small percentage of SRRIX is CAT bonds. That certainly would not justify a high fee, and they have a fund that buys only them and has lower fee. They are effectively running a reinsurance company for LENDX (he meant SRRIX) investors that negotiates agreements to buy prorata shares of other reinsurers businesses---no cherry picking. They negotiate cost sharing arrangements as well, just as reinsurers do.
by larryswedroe » Tue Sep 24, 2019 5:08 am
SRRIX, basically it buys quota shares from the largest reinsurers, partnering with them in the exact same risks the reinsurers take, a risk sharing arrangement. But difference is losses limited to the investment and of course the fund balance sheet is only the highest quality ST instruments and thus has no risk there, which reinsurance companies do. So example would be 2008 when reinsurance stocks got hammered while reinsurance did well with no major hurricanes or earthquakes.
Post by larryswedroe » Mon Sep 23, 2019 5:23 am
The insurance companies have other risks on their books including their stock, bond and RE investment portfolios. Those also provide returns in addition to reinsurance risks. Investors have no need for those risks as they already have them in their portfolios. SRRIX is the way to ISOLATE those risks. Also the idea of overcapacity and collapse in returns is just factually incorrect. In fact the no loss return (no one expects no losses) is now over 4% higher than it was at start of 2017 for variety of reasons. While more capital comes in demand for insurance globally rises as places like China, India and other countries with emerging middle and upper class and business markets develop. Also I would note as typically happens dumb retail money flees as the sign of losses, so some capital left, helping to books premiums.
by larryswedroe » Wed Oct 17, 2018 10:24 am
The difference is that the reinsurance premium, expected returns, is about equity return AFTER fees. Not in liquid CAT bonds, but in illiquid quota shares.
by larryswedroe » Mon Jun 04, 2018 9:55 am
I would add re comments on spreads, comment if directed at the CAT bond market I would agree with, which is one reason not to invest in them today as spreads have come way down and with them now you don't get an illiquidity premium either. And you have concentrated risks. However for the quota shares, while spreads may have come down we believe expected returns are still in the 8% range (and rising interest rates helps returns so good inflation protection) and vol of about half of stocks. And totally uncorrelated (which means can have both negative).
by larryswedroe » Mon Jun 04, 2018 6:21 am
Just to correct a few misconceptions

First, there have been claims that Stone Ridge is a bunch of people who have only derivatives experience not "real" experience working with real reinsurers. Amazing to me that there are people on this site who often make claims as facts when they have no clue what they are talking about. in fact SR has many on the team running SRRIX who have senior experience at multiple reinsurers. Here is a list of them: SCOR·XL Mid Ocean·Munich Re·ACE· Axis·Allianz·Renaissance Re· AXA · Validus

Second, re who is on other side of trades, since SR basically only buys quota shares, which I pointed out many times, which are entire slices of the book of some of the leading reinsurers, they are partners with the leading players. If the reinsurers didn't think the premium was appropriate for the risk it would not be on their books. SR is seeking reinsurance beta, which is what you want. Not a fund seeking alpha like the hedge funds do, thinking their underwriters are smarter. So it is an own the market approach, globally diversified by risks and geography.

Third, we looked at the idea of owning an index of reinsurers but that is a very bad idea, and we discussed it with many others as well since it would be much cheaper, but reinsurers have large market betas. Even talked with fund family about running one. But we decided it was poor idea. In 2008 if memory serves, their stocks fell 20% plus while it was a very good year for underwriting (after losses in 2005 premiums went up and there were very few losses). You don't want the market beta risk you already have.
by larryswedroe » Sun Apr 09, 2017 6:25 am
In the case of reinsurance, SRRIX doesn't invest in the equivalent of CDOs, it buys entire slices of a reinsurers businesses, not securities or packages of risks that could contain the same risks over and over again.And I would add that it reason you want a top management team with deep experience in the business to manage the underlying risks, not just buying some CAT bonds which would be cheap to do.
by larryswedroe » Sat Apr 08, 2017 5:46 am
One other point---financialization of CAT bonds, which the insurers/reinsurers started in the 90s, led to that risk now being available to investors and not only on the balance sheets of insurers. This led eventually to them become more liquid over time as the supply became greater and investors became more familiar. And those factors led to lower spreads over Treasuries--exactly the same process that happens with other new instruments, with TIPS being perfect example. And the lower yields on Treasuries pulled all yields down. That's one reason, besides the concentration risk I would avoid CAT bonds (note the fund uses them to small degree to meet it's liquidity requirements of being able to meet 5% minimum redemption request).

Here with SRRIX you still have a highly illiquid investment and liquidity is a priced risk.
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by Girya » Sun Dec 01, 2019 7:48 am

As someone who owns a small position in SRRIX (which I have been attempting to liquidate) I can give some thoughts on this product from the perspective of a retail investor.

1-If one so chooses to invest this is the ultimate buy and hold strategy, due to the high illiquidity. In periods of stress and demand, the funds will grant at most 20% (usually only 5%) redemption per annum. So it could take up to five years to vacate a position. This illiquidity is somehow compensated, or so it’s claimed, but I’m unsure how. Perhaps by dividends? Apparently the big distribution is in December so I’ll let you know.

2- As a retail buyer you are participating directly in the business; approximately 16% of the capitol currently committed to reinsurance comes from investors. So it’s different than simply buying stock in reinsurance companies, which ultimately have market beta. So theoretically it is a wholly different sort of risk; whether that risk is appropriately compensated remains to be seen.

3-Very, very expensive. 2.39%. That cost goes to them regardless of how successful they are in their business. SRRIX took a huge tumble in 2017, and another in 2018. So if you purchased in at that time, as I did, the fund would need to regain 12-20% portion of value. That being said it’s now persistently cheaper than it was a few years ago.

4-Increasing catastrophic weather events make it hard to arbitrage any reinsurance premiums. Where are they? There seems to be few places on earth free of hurricanes, wildfires, flood, etc. Although this is historically a good investment, I do question whether that time has passed.

5-Really should only be in a tax protected space so essentially only a Roth because the income from these is ordinary, not capitol. I suppose a high bracket investor could use it in taxable in place of muni bonds, maybe, but seeing as it essentially cannot be harvested due to the interval structure, maybe only Roth or a self directed traditional will do. No brokerage or 401k space works with this product.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by larryswedroe » Sun Dec 01, 2019 11:07 am

re Girya's statements
The first statement about the MOST the fund will redeem is 5/20 is factually incorrect. It is the LEAST the fund will redeem. It holds liquid assets equal to 5% and also has back up lines of credit it can call on. This is SEC requirement to be an interval fund. Stone Ridge has in fact redeemed MORE THAN 5 percent several times already and will likely do so again in December as it attempts to do the right thing for its investors. They continue to bring in new assets and that can allow them to redeem more than the 5% minimum (even though they don't have to) and they can choose to not renew some contracts that mature during the year. Note also that not all investors seek to redeem. So if half ask then they can get at least 10%, not 5%. And that has been the case with those requesting redemptions getting not their full request but much more than 5%.

2) The fund is expensive relative to an INDEX fund which needs virtually no management. Here there is no way to run an index fund. You are in the reinsurance business. (Same thing with LENDX, you are running a bank, not an index fund. You have to develop long term relationships with strategic partners and you have to have experienced team to negotiate and understand the risks, deal with regulators, investors, and so on. IMO the right way to view this is say you expect an 8% net return. The gross return is say 10.4% so you have a reinsurance business with a profit margin about 77%. You avoid all the other high costs of running a reinsurance company. The only issue one should be really concerned about is: Is the 8% sufficient compensation for the risks? BTW now it's higher than past due to premiums rising dramatically.

I would add that now there is another player, Pioneer which has gained sufficient size in the space and has strong team and is bit cheaper at 2% and chooses to take bit more remote risk, so bit lower expected return for more out of money risk. It is also worth looking at. (XILSX). We have been doing due diligence on them for now three years. This is exactly what we hoped would happen, competition comes in to hopefully lower costs as we have seen in other financial products. As noted, the issue is not whether something is higher costs, but is it compensating for the risks and the best available.

As to tax inefficiency. Yes one should obviously hold in tax advantaged account but don't know why that would be limited to Roth. Self directed IRAs work just as well. That's where I own them. And as to liquidity, if not in withdrawal phase there is no need. And if in withdrawal phase even at age 90 there is only about 10% RMD, so not an issue for a long term investor, the only kind there should be. And of course doesn't have to be, nor should it be, the only asset you hold, it's about diversification of risks.

As to distributions, they happen with income, but of course don't get any in year with losses.

As to the statement about the time for reinsurance having passed. Warren Buffett certainly doesn't think so as his company's exposure keeps increasing (belying the statement that it is overcrowded, if so why hasn't their exposure fallen?) , and the poster must believe that risks are being taken without the expectation of profits. Have to explain why any insurance company, with all their scientists and mathematicians, would put capital at risk without an expected return that fully compensates them for the risks. Are these just dumb people? You cannot believe in efficient markets and believe the risks are not priced. Here's good example, long ago the insurers walked away from underwriting US flood insurance because they could not charge sufficient premiums. Which is why today the US government provides that insurance. If the industry believed it was not being fully compensated then capital would exit.

Of course no one knows the future. Will risks turn out to be more or less than priced? We don't know. Which is why we diversify, not avoid risks. The same can be said about all risky assets

Best wishes
Larry

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sun Dec 01, 2019 11:46 am

Interesting points but the assumption that just because re-insurers are traded they somehow become more correlated with market is in opposition to the efficient market hypothesis. Becoming more liquid in this context is a negative in contrast with the more accepted concept of a liquidity premium in all other sections of the market. IMO the idea just because an asset class becomes traded the mechanism of price discovery changes so that a re-insurer risk becomes market risk is silly. Now I am not saying this may not happen for short periods but implying that this is ongoing refutes efficient markets.

One other item about buying interval funds that provide limited liquidity, the return data (and correlations) may be a mirage. Since the sponsor does not provide liquidity, except over an extended period of time, the returns are not real returns but just theoretical since you cannot redeem & comparing them to asset with real returns that have price discovery (like re-insurance stocks) is like comparing apples and oranges. Now there are some private funds that do provide liquidity, BNL is an example, but most do not.

IMO if you want re-insurance risk, you should take it with some fixed income and equity risk when you can get annual returns of 10%+ per year (over the past 5 years) versus the "pure", expensive & illiquid re-insurance risk you are getting with some of the re-insurance interval funds. In the end it is a question of costs versus benefits and IMO you can get more of the benefits of re-insurance risk via select insurers versus re-insurance funds.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by larryswedroe » Sun Dec 01, 2019 11:55 am

Packer
One other item about buying interval funds that provide limited liquidity, the return data (and correlations) may be a mirage.
The fund run by Stone Ridge is not like say private equity without daily pricing and thus serial correlation in returns.

The fund prices risks DAILY based on industry models and the prices are audited by as well by outside firm. SR is not setting the prices itself. It makes best estimates of the losses on daily basis based on outside inputs which are reviewed (audited).

Larry

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by Girya » Sun Dec 01, 2019 12:15 pm

Larry I remain unconvinced, but always open minded. Investing is always mysterious in this way, and I will remain curious.

I have not heard an argument where the reward is appropriately compensated by the risk premium (or even what that premium may be). What I do see is an illiquid asset down 12%; I know it’s down 12% and remains down, for well over six months, because it does price daily. Even in spite of face valid arguments (catastrophic weather events are increasing with the rise in global temps) you discuss its upside, as I’m sure you would as I understand you’ve invested in this yourself. I would prefer to not participate in a sunk cost fallacy.

But that being said and in honor of being open-minded, you had mentioned that you had written a white paper discussing some of this; would you please post it here so that we can read and discuss?

Thank you as always for the spirited, thoughtful and respectful discussion.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sun Dec 01, 2019 12:29 pm

larryswedroe wrote:
Sun Dec 01, 2019 11:55 am
Packer
One other item about buying interval funds that provide limited liquidity, the return data (and correlations) may be a mirage.
The fund run by Stone Ridge is not like say private equity without daily pricing and thus serial correlation in returns.

The fund prices risks DAILY based on industry models and the prices are audited by as well by outside firm. SR is not setting the prices itself. It makes best estimates of the losses on daily basis based on outside inputs which are reviewed (audited).

Larry
I agree in theory this is correct but without a market to sell the shares the theoretical value has limitations as does the price discovery process, which is based upon mark to model. A real comparison to re-insurance stocks would be to compare the average price of re-insurance over the sell period you could sell your interval fund shares. This would also be a way to measure volatility which I think would smooth the re-insurance volatility considerably. Does the Pioneer product also have the sale limitations as the Stone Ridge product have?

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sun Dec 01, 2019 12:32 pm

I put together my post above to aid in understanding about what SRRIX does and how it operates. I did this as much for myself as I did for others on the forum. I have been reading about the fund for 2-3 years and still didn't understand very well. Keep in mind that I have been investing for some 35 years now, I would like to believe that I am a fairly smart individual but I have to say that these concepts were not the easiest thing to understand. It makes me feel better that a Medical Doctor was trying to understand this as well.

So I started with a short summary of what Larry said, quoted the Investopedia definitions of CAT Bonds and Quota shares to aid understanding, and then listed the quotes. I went back through quite a few posts and excerpted the best material that explains this. I did this in the hope that this would clarify things and not muddy the waters further.

If anyone on the thread struggles with understanding the fund, please read my post above and go through the Larry Swedroe quotes. It helped me as I went through the material and putting the post together, the little lightbulb in my head went off! :idea:
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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by larryswedroe » Sun Dec 01, 2019 12:36 pm

Packer
All interval funds have the same sell limitations. The difference is at least for us we have daily buy liquidity, though the same redemption risks.

But at least we know that SRRIX is marked to market daily. You can see this if you watch the fund NAV as a storm approaches. While no losses have occurred the NAV reflects the odds of a storm landing and the estimate of its strength and the losses that would be occurred. As more information arrives and forecasts get more accurate daily the NAV moves to reflect that. So if a storm misses landing then the NAV will rise, if it hits and storm worse than expected NAV will fall.

Pioneer does not follow that process and waits until losses have more certainty, until after a landing I believe. Then adjusts over time as actual losses become known. So it looks more artificially stable.

Best
Larry

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by stlutz » Sun Dec 01, 2019 1:18 pm

larryswedroe wrote:
Sun Dec 01, 2019 12:36 pm
But at least we know that SRRIX is marked to market daily.
What are the market securities that are used to perform this valuation? For example, most positions that are held by a municipal bond fund do not trade each day. But based on how other muni bonds traded that day, they can assign a market value to the other positions.

My understanding is that CAT bonds are the only positions in this fund that ever have a daily market price. The other positions are contracts that are entered into with a defined start and end date. I don't see how you would value those outside of using models--actually I think models would be far more accurate.

One can mark-to-model on a daily basis and can do so with reasonable results. I presume that is actually what Stone Ridge is doing.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by stlutz » Sun Dec 01, 2019 1:24 pm

packer16 wrote:
Sun Dec 01, 2019 11:46 am
Interesting points but the assumption that just because re-insurers are traded they somehow become more correlated with market is in opposition to the efficient market hypothesis.
All companies are priced relative to other companies. If other investment opportunities become more attractively priced than in WR Berkeley, then WRBs price will suffer as a result. That says nothing about how WRB is peforming as a business. That is at least partially why WRB still declined rather substantially during the the 07-09 bear market.

Doesn't mean WRB isn't a good investment; just saying that its price is impacted by the pricing of competing investment opportunities.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by packer16 » Sun Dec 01, 2019 1:59 pm

I agree that will they will be priced relatively over the short-term but over the mid & long-term they should be priced by economics. Since the some of the alternative (interval funds) have more limited liquidity, to compare on an apples to apples basis the returns should be compared on a weighted average basis in the pattern you can sell the interval fund. This would probably smooth the volatility associated with re-insurance firms.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by klaus14 » Sun Dec 01, 2019 2:14 pm

nedsaid wrote:
Sat Nov 30, 2019 9:57 pm
I raised some questions and I remember that Larry Swedroe has addressed my concerns about the Stone Ridge Re-Insurance fund. I wondered if SRRIX was getting the leftovers after the large reinsurers had gotten the best deals. What happens is that SSRIX buys pro-rata shares of other insurers businesses, he refers to these as Quota Shares. I also had concerns about the experience of the people running the fund. Larry says that many of the managers have had senior experience at other reinsurance firms. I also had concerns about the market for reinsurance becoming crowded, Larry said that yes the amount of capital coming in are increasing but with increased middle class in China and India that demand will also rise. I also discussed skepticism about the fund eliminating beta risk, Larry cited 2008 when reinsurance stocks fell 20% and yet the actual reinsurance industry did well that year. Finally, the illiquidity premium comes from SRRIX owning Quota Shares which are illiquid and not from CAT Bonds which are liquid. Big reason that the fund is in an Interval Fund format.

It is clear from Larry's comments that SRRIX purchases mostly Quota Shares and has a small part of its assets in Catastrophe Bonds. I enclosed definitions of these terms from Investopedia to aid in understanding. So I will search and find what he has said in the past:

From Investopedia:
What Is a Catastrophe Bond – CAT?
A catastrophe bond (CAT) is a high-yield debt instrument designed to raise money for companies in the insurance industry in the event of a devastating natural disaster. A CAT bond allows the issuer to receive funding from the bond only if specific conditions occur such as an earthquake or tornado. However, if the special event protected by the bond triggers the payout to the insurance company, the obligation to pay interest and repay the principal is either deferred or completely forgiven.

CAT bonds have short maturities not exceeding three to five years. The primary investors in these securities are hedge funds, pension funds, and other institutional investors.

https://www.investopedia.com/terms/c/ca ... hebond.asp

What Is a Quota Share Treaty?
A quota share treaty is a pro-rata reinsurance contract in which the insurer and reinsurer share premiums and losses according to a fixed percentage.

Quota share reinsurance allows an insurer to retain some risk and premium while sharing the rest with an insurer up to a predetermined maximum coverage. Overall, it's a way for an insurer to boost and preserve some of its capital.

https://www.investopedia.com/terms/q/qu ... treaty.asp

I also found this definition at irmi.com:

Quota Share Reinsurance — a form of reinsurance in which the ceding insurer cedes an agreed-on percentage of every risk it insures that falls within a class or classes of business subject to a reinsurance treaty.

by larryswedroe » Thu Nov 28, 2019 2:49 pm
Note you don't see Berkshire exiting reinsurance, they are growing their assets, the very same assets SRRIX buys.
by larryswedroe » Fri Sep 27, 2019 11:02 am
For example, only a very small percentage of SRRIX is CAT bonds. That certainly would not justify a high fee, and they have a fund that buys only them and has lower fee. They are effectively running a reinsurance company for LENDX (he meant SRRIX) investors that negotiates agreements to buy prorata shares of other reinsurers businesses---no cherry picking. They negotiate cost sharing arrangements as well, just as reinsurers do.
by larryswedroe » Tue Sep 24, 2019 5:08 am
SRRIX, basically it buys quota shares from the largest reinsurers, partnering with them in the exact same risks the reinsurers take, a risk sharing arrangement. But difference is losses limited to the investment and of course the fund balance sheet is only the highest quality ST instruments and thus has no risk there, which reinsurance companies do. So example would be 2008 when reinsurance stocks got hammered while reinsurance did well with no major hurricanes or earthquakes.
Post by larryswedroe » Mon Sep 23, 2019 5:23 am
The insurance companies have other risks on their books including their stock, bond and RE investment portfolios. Those also provide returns in addition to reinsurance risks. Investors have no need for those risks as they already have them in their portfolios. SRRIX is the way to ISOLATE those risks. Also the idea of overcapacity and collapse in returns is just factually incorrect. In fact the no loss return (no one expects no losses) is now over 4% higher than it was at start of 2017 for variety of reasons. While more capital comes in demand for insurance globally rises as places like China, India and other countries with emerging middle and upper class and business markets develop. Also I would note as typically happens dumb retail money flees as the sign of losses, so some capital left, helping to books premiums.
by larryswedroe » Wed Oct 17, 2018 10:24 am
The difference is that the reinsurance premium, expected returns, is about equity return AFTER fees. Not in liquid CAT bonds, but in illiquid quota shares.
by larryswedroe » Mon Jun 04, 2018 9:55 am
I would add re comments on spreads, comment if directed at the CAT bond market I would agree with, which is one reason not to invest in them today as spreads have come way down and with them now you don't get an illiquidity premium either. And you have concentrated risks. However for the quota shares, while spreads may have come down we believe expected returns are still in the 8% range (and rising interest rates helps returns so good inflation protection) and vol of about half of stocks. And totally uncorrelated (which means can have both negative).
by larryswedroe » Mon Jun 04, 2018 6:21 am
Just to correct a few misconceptions

First, there have been claims that Stone Ridge is a bunch of people who have only derivatives experience not "real" experience working with real reinsurers. Amazing to me that there are people on this site who often make claims as facts when they have no clue what they are talking about. in fact SR has many on the team running SRRIX who have senior experience at multiple reinsurers. Here is a list of them: SCOR·XL Mid Ocean·Munich Re·ACE· Axis·Allianz·Renaissance Re· AXA · Validus

Second, re who is on other side of trades, since SR basically only buys quota shares, which I pointed out many times, which are entire slices of the book of some of the leading reinsurers, they are partners with the leading players. If the reinsurers didn't think the premium was appropriate for the risk it would not be on their books. SR is seeking reinsurance beta, which is what you want. Not a fund seeking alpha like the hedge funds do, thinking their underwriters are smarter. So it is an own the market approach, globally diversified by risks and geography.

Third, we looked at the idea of owning an index of reinsurers but that is a very bad idea, and we discussed it with many others as well since it would be much cheaper, but reinsurers have large market betas. Even talked with fund family about running one. But we decided it was poor idea. In 2008 if memory serves, their stocks fell 20% plus while it was a very good year for underwriting (after losses in 2005 premiums went up and there were very few losses). You don't want the market beta risk you already have.
by larryswedroe » Sun Apr 09, 2017 6:25 am
In the case of reinsurance, SRRIX doesn't invest in the equivalent of CDOs, it buys entire slices of a reinsurers businesses, not securities or packages of risks that could contain the same risks over and over again.And I would add that it reason you want a top management team with deep experience in the business to manage the underlying risks, not just buying some CAT bonds which would be cheap to do.
by larryswedroe » Sat Apr 08, 2017 5:46 am
One other point---financialization of CAT bonds, which the insurers/reinsurers started in the 90s, led to that risk now being available to investors and not only on the balance sheets of insurers. This led eventually to them become more liquid over time as the supply became greater and investors became more familiar. And those factors led to lower spreads over Treasuries--exactly the same process that happens with other new instruments, with TIPS being perfect example. And the lower yields on Treasuries pulled all yields down. That's one reason, besides the concentration risk I would avoid CAT bonds (note the fund uses them to small degree to meet it's liquidity requirements of being able to meet 5% minimum redemption request).

Here with SRRIX you still have a highly illiquid investment and liquidity is a priced risk.
Thanks! I learned a lot from this.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by larryswedroe » Sun Dec 01, 2019 2:44 pm

Packer, first, keep in mind that you can BUY the fund daily, not restricted to quarterly. Also while cannot sell except quarterly clients do experience the returns as often as they check the NAV (:-)) And fwiw, don't think would make any difference in decision of whether to invest or not.

I would add one more point, which I have made before, about overcapacity issue. The mistake IMO most are making is that yes there is certainly more capital chasing all alternatives due to zero real, or negative real, interest rates now for 10 years. That has led to "overcrowding" in all risk assets with all risk premiums down, including for stocks, especially US stocks. But also many other assets like high yield debt and REITS. So yes returns may be somewhat compressed vs what they would have been otherwise, but I don't believe the risk premium for reinsurance has fallen much if any-remember instead of 2%+ real returns to 5 year bonds now at negative expected real return. And if losses return to historical say 8% then expected return is now in excess of 13%. Of course, perhaps models are outdated due to climate change. No one knows the answer to that one. But not only do losses lead to higher premiums, they lead to much tougher underwriting. Example, after huge losses in 1993 with Hurricane Andrew, building codes were raised to demand hurricane proof windows/shutters, and now you see much more concrete and brick construction vs. wood. And same thing now with Cal fires, no cannot get insurance unless no trees within 30 feet of house and then another 30 feet I believe of brush must be cleared and trees must be separated by certain distance.

Like I said, IMO Buffett talks his book, saying reinsurance overcrowded as he would like to see less capital there. But his company keeps growing its exposure.

Best
Larry

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by nedsaid » Sun Dec 01, 2019 7:09 pm

klaus14 wrote:
Sun Dec 01, 2019 2:14 pm

Thanks! I learned a lot from this.
Klaus14, I am glad somebody read this and got something out of it. Keep in mind that I am learning this as well. My very foggy memory banks recalled that Larry had addressed the issues I had raised and so I did a project last night to put all of this together. As I thought about it, it seemed only fair to quote old Larry Swedroe posts that addressed this.
A fool and his money are good for business.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by klaus14 » Sun Apr 05, 2020 4:03 pm

Looks like Reinsurance diversification had some merit during this crisis.
SRRIX is up YTD vs reinsurance stocks are down.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by Alpha4 » Thu May 21, 2020 11:05 pm

klaus14 wrote:
Sun Apr 05, 2020 4:03 pm
Looks like Reinsurance diversification had some merit during this crisis.
SRRIX is up YTD vs reinsurance stocks are down.
Where are you finding the returns for this as of 3/31/2020 or 4/30/2020? I checked the Prospectus for SRRIX on Stone Ridge's website and it only has returns up to 10/31/2019 when the fund's fiscal year ended (why can't they just show returns as of the December 31st end of the calendar year like other funds do and for that matter which their own fund SHRIX does?). I checked Yahoo, Morningstar, Schwab, TDAmeritrade, Fido, etc and none of them had any info on returns for this fund for this year or really much info at all on returns for SRRIX.

If you have a source for quarterly (or ideally, monthly) return data for SRRIX can you please post it here? Thank you.

Also, not totally related but didn't SHRIX do somewhat better than SRRIX over the last two or two-and a half years when SRRIX did pretty poorly? Any idea why this was?

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Re: Purchase of Re-insurance risk outside of re-insurance funds

Post by BJJ_GUY » Sat May 23, 2020 8:10 am

larryswedroe wrote:
Sun Dec 01, 2019 12:36 pm
Packer
All interval funds have the same sell limitations. The difference is at least for us we have daily buy liquidity, though the same redemption risks.

But at least we know that SRRIX is marked to market daily. You can see this if you watch the fund NAV as a storm approaches. While no losses have occurred the NAV reflects the odds of a storm landing and the estimate of its strength and the losses that would be occurred. As more information arrives and forecasts get more accurate daily the NAV moves to reflect that. So if a storm misses landing then the NAV will rise, if it hits and storm worse than expected NAV will fall.

Pioneer does not follow that process and waits until losses have more certainty, until after a landing I believe. Then adjusts over time as actual losses become known. So it looks more artificially stable.

Best
Larry
My concern with reinsurance via an interval fund structure, is that there is no good way to deal with loss provisions - inevitable loss creep - during a time of redemption pressure. The structure works until it doesn't. Two problems mechanically/functionally: After bad performance outflows may (likely) outpace inflows which results in 1.) capital being trapped, unable to deploy a full amount of fresh $ into the next semi-annual underwriting period at what should be more attractive premiums, post a bad year; and 2.) with interval funds commingling all investor's capital, redeemers will be subsidized by patient investors (and even new investors) to some extent depending on how much capital is provisioned - plus any subsequent loss creep.

I otherwise agree with the relative lack of concern about the ability to mark the book, and for performance to reflect something true to underlying value. The marks are less complex for this fund than folks are making them out to be. Premiums known, though loss estimates can be sketchy. Either way, this isn't like private equity marks where one has a legitimate beef with the value "not being real because it can't be readily sold etc."

Either way, I just don't think interval funds are a great idea for reinsurance. Just one person's opinion.

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