RBS pension fund reinsurance & ILS linked allocation hits $1.3 billion

by Artemis on May 30, 2017

The Royal Bank of Scotland (RBS) pension fund increased its insurance and reinsurance linked assets by roughly 73% in 2016 to £1 billion (US$1.3 billion), and is looking at the option of adding more amidst an expectation of more attractive pricing in the future.

The insurance asset class segment of the RBS pension scheme’s Main Fund is made up of non-life risks (catastrophe reinsurance) from Nephila, life risks (inc. settlements) via Leadenhall, and litigation finance holdings in Juridica.

The £1 billion (US$1.3 billion) at year-end 2016 compares with £575 million (roughly US$849 million at then-current exchange rates) for the nine months ending December 31st, 2015.

Nephila Capital, the largest reinsurance linked investment manager in the world, saw the main fund increase its allocation to the Nephila Cronus Fund (reinsurance) to £378 million in 2016 (US$490 million), growth of 31% on the £288 million (US$425 million at then-current exchange rates) as at December 31st, 2015.

But while it’s clear the fund’s holdings in Nephila accounts for approximately 38% of its insurance allocation, it fails to disclose what percentage is attributed to both Juridica and Leadenhall.

RBS also reveals that the Main Fund utilised Leadenhall, a specialist London-based insurance and reinsurance linked securities investment manager, for part of its £8.5 billion (US$11 billion) credit investments in 2016, and although it fails to break out exactly how much this is, it does reveal that this relates to settled annuities.

This is the same as in 2015, when RBS reported credit assets within the Main Fund of £6.528 billion (US$8.85 billion at then-current exchange rates), which included settled annuities via Leadenhall, but again failed to disclose the actual size of the investment.

The RBS AA Section of the fund, which is financially separate from the remainder of the Main Fund and which RBS explains was created after the merger of final salary section of RBS AA Pension Scheme with the Fund on 31st March 2012, also has an allocation with Nephila and Juridica.

The insurance asset class segment of the RBS AA section as at December 31st, 2016 totalled £24 million (US$31 million), of which £14.9 million (US$19.3 million), or 62% was invested in the Nephila Cronus Catastrophe Fund (reinsurance). Suggesting that the remaining £9.1 million (US$11.8 million), or 38% was invested in litigation finance via investment manager Juridica.

For the nine months ended December 31st, 2015 the RBS AA section’s investment in insurance and reinsurance-linked assets totalled £16 million (US$23 million at then-current exchange rates), although it’s unclear for this year the split between Nephila and Juridica.

Commenting on the pension schemes insurance and reinsurance linked investments, RBS explained; “The increase in demand for assets in the catastrophe re-insurance sector has reduced the insurance premium available from the asset class and the risk-adjusted expected return has fallen as a result.

“The Main Fund Section’s re-insurance mandate has been running below its normal risk profile in the expectation of more attractive pricing opportunities in this market.”

This suggests RBS will look to increase its insurance and reinsurance linked investments when market conditions are more favorable and the growth witnessed year-on-year highlights its growing confidence at working with insurance and reinsurance linked investment managers.

Artemis wrote in 2013 that the RBS Group pension fund had increased its ILS and re/insurance allocation to £527 million, which increased to the £575 million recorded in 2015, and to the £1 billion reported at the end of 2016.

Overall, net assets of the Fund (Main Fund and RBS AA Section) reached approximately £45.3 billion (US$58.8 billion) as at 31st December, 2016. Compared with £31.9 billion (US$47 billion at then-current exchange rates) a year earlier, representing growth of roughly 42%.

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