This year has seen extremely high levels of interest in the reinsurance linked investments space from large institutional investors such as pension funds, mutual funds and sovereign wealth funds. We can attest to this as we see a growing proportion of our audience coming from these and other classes of investor. A significant amount of new capital has entered the space in the last year, Aon said $5 billion entered the space while Moody’s felt it was $6 billion, and a lot of that is down to pension funds.
We wrote recently that the Fire and Police Pension Fund of San Antonio had deployed capital into the DaVinci Re sidecar and that the Ontario Teachers’ Pension Plan (already an investor in ILS and cat bonds) had become the largest investor in Dutch specialty re/insurer ANV Holdings BV. Large deployments of capital by pension funds into the reinsurance space, be that directly in a re/insurer, into a collateralized reinsurance fund or ILS fund and even directly into instruments like catastrophe bonds, is becoming more and more common.
The latest case of this we’ve heard of that is worth mentioning (there are many small deployments of pension fund capital) is the Royal Bank of Scotland (RBS) Group pension fund. In the latest newsletter to their members they explained that the pension fund has reduced its portfolio of equity futures by about £2 billion and is increasing its exposure to what it calls growth assets, including alternative investments.
As part of this change to their mix of investments, the RBS pension fund in the year to 31st March 2012 allocated almost £400m to a new asset class, reinsurance. We don’t know who the allocation went to, whether it is with a fund manager or directly invested, but given RBS’ desire to reduce their equity exposure it’s likely that it won’t have been in reinsurer equity.
The £400m equates to roughly 1.8% of the RBS pension funds assets, which is inline with observers who have commented before that pension funds could safely allocated as much as 2% of their assets into insurance-linked or reinsurance-linked investments.
It’s testament to the attractiveness of the reinsurance space that the RBS pension fund made such a large allocation to reinsurance in their first year of investing in the sector. We suspect that many more stories of pension funds allocating to the sector will continue to emerge over the coming year as the reinsurance-linked asset space shows no sign of losing any attraction as an investment opportunity.