Aegon and Deutsche Bank in record €12 billion longevity swap deal

by Artemis on February 17, 2012

The largest publicly reported longevity swap (that we’re aware of) has been announced today between Aegon and investment bank Deutsche Bank. The €12 billion deal see’s Aegon partially offset the risk of future increases in the Netherlands and they say that as a result of this capital markets longevity swap transaction as much as a third of their underlying reserves within their Dutch business is now covered against future increases in longevity.

It’s the largest longevity swap transaction we’ve heard of in the market and is also one of the first outside of the UK, where most longevity swaps have been transacted to date, and the first in continental Europe according to reports. The transaction allowed Aegon to pass on €12 billion of longevity risk to Deutsche Bank who in turn facilitated the transfer of the risk to capital markets investors. Deutsche Bank say this is the first longevity swap to be targeted directly to the capital markets.

Aegon said in their annual results that were published today that the transaction reduces their required capital at an attractive cost of capital.

The transaction has been based on Dutch population data which has been applied to a synthetic portfolio. This enables Aegon to hedge the liabilities on a portion of their book of annuities.

Deutsche Bank said that by distributing the risk of this trade in the capital markets, they were able to manage the longevity risk taken on through the transaction while at the same time offering investors access to a new, diversified asset class. Use of the capital market significantly increases the capacity for hedging longevity risk that already exists in the reinsurance market.

The size of this transaction is particularly interesting as it demonstrates the appetite investors have for longevity risk as an asset class. With the amount of longevity risk that is being transferred through reinsurance transactions and pension risk transfer deals we expect to see further large longevity deals come to market this year. A successful transaction of this size could be just what the market needs to stimulate further activity and growth. A growing use of capital market longevity risk transfer solutions would be welcomed by institutional investors around the world.

Clare Hennings, Head of Structured Insurance Solutions at Deutsche Bank, commented on the transaction; “Deutsche Bank continues to use its extensive experience in longevity risk management to address the complexities of the economic, regulatory and market environment faced by both our clients and investors. We believe this market will continue to grow as insurance companies and pension funds look at new ways to manage their liabilities while investors seek diversified investment opportunities.”

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