Credit Update: Attractive 6+% USD/GBP bonds offered by Rothesay (GIC-owned)

2. Rothesay’s investment portfolio remains conservative and high in quality

• Assets under management rose 1.1% to £74.3b (FY25: £73.5b), and credit quality remains high. Over half of its rated assets are rated AAA or AA. Of the £26b of corporate and infrastructure bonds, only £0.6b (~2%) is rated BBB-; sub-investment-grade holdings fell to £18m (FY25: £30m), negligible against the £74.4b book. The asset mix also shifted towards higher-quality assets: cash, UK sovereigns, other sovereigns and supranational bonds rose to 42% of the portfolio (excluding derivatives). This matters as Rothesay uses financial derivatives to match its assets to its pension liabilities. When markets move sharply, it must post collateral to swap counterparties at short notice, and it uses these liquid holdings to meet those calls. Encouragingly, the liquid share rose when long-term rates went up, which suggests collateral needs were met without drawing down the buffer. Crucially for bondholders, this means Rothesay should not need to sell its illiquid secured loans in a hurry, which could crystallise losses and soften the credit profile.

• Secured lending remains conservatively underwritten. Mortgages and other secured lending held steady at 28% of financial assets (FY25: 28%; see Table 2 below). Lifetime mortgages (loans to over-55s with interest rolled up) rose 1.5% to £6.9b (FY25: £6.8b), while long-term fixed-rate mortgages fell 7.3% to £5.1b (FY25: £5.5b). New lifetime mortgages were written at an average loan-to-value of 28% (FY25: 29%), so house prices would need to fall by over 70% before a new loan exceeded the property's value, although rolled-up interest erodes this cushion over time. Do note that these assets are valued using internal models rather than market prices, so their values rest on Rothesay's own assumptions, a risk underlined by the £313m leasehold write-down.

• Looking ahead, we expect the portfolio to stay defensively positioned and high in quality, even if long-term rates rise further. Higher interest rates would trigger larger collateral calls on Rothesay’s swaps and weigh on its accounting profits. However, the group carries substantial buffers, including the 42% collateral buffer provided by its highly liquid assets of cash and sovereign bonds. These can be posted as collateral without forced sales, and its £5.0b solvency surplus leaves ample room to absorb losses. Its hedging programme also limits the solvency impact, as it matches assets to liabilities so that both move together when rates rise. On balance, we think Rothesay’s investment portfolio continues to be high-quality and conservatively managed.

Table 2: Liquid assets rose slightly as a share of the book

3. Solid credit profile underpinned by healthy capital ratios and adequate liquidity

• Solvency remains strong even after the special dividend paid post 1H26. SCR coverage softened modestly to 235% (FY25: 246%) and 211% (pro-forma, post payout of special dividend). This slight decline is partially due to an increase in new business premiums*, alongside the swing to a pre-tax loss. We note that pro-forma SCR of 211% retains ample headroom above the regulatory requirement of 100% and comfortably above management’s target range of 140%-160%. Moving forward, management expects coverage to move closer to the target range as Rothesay underwrites more new business premiums.

*Writing new business premiums consumes capital in two ways: it increases the SCR, as more risk sits on Rothesay’s book, and it uses up the group’s own funds at the outset as reserves are set aside for the new liabilities. Both lower SCR coverage.

• Leverage metrics have elevated but remain healthy (see Table 3 below). Leverage (borrowings / eligible own funds) was 31.8% (FY25: 29.9%). Do note that this metric rises to 41.1% if we also count the £793m sterling Restricted Tier-1 (RT1) perpetuals, which are booked under equity. We prefer the latter figure and note that both leverage metrics rose compared to FY25 owing to reasons we covered above regarding SCR and pre-tax loss. Nevertheless, we remain comfortable with Rothesay’s leverage metrics.

• On the other hand, coverage has improved since our initiation. Interest coverage ratio ( TTM adjusted operating profit/ TTM borrowing costs) picked up to 6.4x compared to FY25’s 6.1x as earnings grew much faster than interest costs. This improvement strengthens Rothesay’s debt-servicing capacity and is a boon for bondholders.

• Liquidity appears adequate, although there are gaps in the interim data. As of 30 June 2026, Rothesay carries £301m in cash (FY25: £277m), which alone does not cover near-term obligations, including the £500m of Tier 2 notes due July 2026 and the interim and special dividends declared in August. That said, Rothesay can draw on its liquid assets (42% of financial assets in cash and sovereign bonds) and the £750m undrawn credit facility cited at our initiation. Hence, we see low near-term refinancing risk for Rothesay.

• Looking ahead, we expect Rothesay’s credit profile to remain healthy. That said, we expect SCR coverage to ease and leverage metrics to edge up as the group writes more business. Nevertheless, any anticipated softening should not materially weaken Rothesay’s credit profile. Finally, interest coverage should remain healthy, supported by steady in-force earnings.

Table 3: Solvency and leverage softened from very high levels; coverage has improved

Recommendations

Table 4: GBP and USD bond recommendations 

• Overall, we think Rothesay’s credit profile remains stable. New business premiums returning to growth, alongside the stability of its recurring earnings stream, have lifted adjusted operating profit. The investment portfolio remains conservatively managed, with an increasing tilt towards high-quality assets (cash and sovereign bonds). Although SCR coverage and leverage metrics have softened, they remain healthy, and we remain comfortable with Rothesay’s credit profile. Interest coverage has improved, which strengthens the group’s debt-servicing capability. Looking forward, while SCR and leverage metrics are expected to soften, we do not expect any material worsening in Rothesay’s credit profile.

• Do note that all three bonds of Rothesay we highlight in Table 4 above are subordinated and rank behind policyholders. The non-perpetual, Tier 2 bonds can defer coupons (on a cumulative basis) and suspend principal payment if Rothesay breaches its SCR or a payment would cause a breach (below 100% SCR). We view this risk as remote given a pro-forma 211% SCR coverage and a ~£4.9b surplus. Unlike bank Tier 2, insurer Tier 2 receives no regulatory capital amortisation ahead of maturity under Solvency II, meaning Rothesay has no capital-driven incentive to call early. Any call decision is therefore economic rather than regulatory, subject to PRA approval, and bonds should be assessed on their reset economics rather than assumed to be called at the first opportunity. Finally, its RT1 perpetuals carry fully discretionary, non-cumulative coupons and can be written down if SCR coverage falls below a predefined trigger (~75% of SCR). While remote at current capitalisation, this is the key risk RT1 investors are compensated for.

• As seen in Table 4 above, we highlight three of Rothesay’s outstanding bonds for consideration: the bullet bonds offer yields-to-worst of 6.89% (both USD and GBP), with 2.7 years and 7.7 years to call. Against comparable US Treasuries/UK Gilts, we find an attractive yield spread of 170+bps. We also highlight one outstanding perpetual: this USD issue provides a yield-to-worst of 7.90%, with 8.65 years to call.  We think these elevated yields and premiums partly reflect Rothesay’s status as a private company, which results in less frequent public disclosure compared to its public peers.

• On balance, we continue to like Rothesay’s GBP and USD bonds. Investors comfortable with lower reporting frequency can consider these outstanding bonds for their attractive yields, backed by Rothesay’s solid credit profile. 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds ROTHLF 7.019% 10Dec2034 Corp (GBP) and the analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.