Delta Lloyd in EUR 12 billion index-based longevity swap with RGA Re

by Artemis on August 22, 2014

Dutch insurance, pensions and investments firm Delta Lloyd has entered into an index-based longevity swap transaction covering €12 billion of its longevity reserves with Reinsurance Group of America.

It’s the first longevity risk transfer or swap transaction which is linked to an underlying mortality index that we’ve covered in some time, as the majority of deals in recent months have concentrated on an insurance/reinsurance approach to transferring longevity risk into the global reinsurance markets.

The deal sees RGA providing longevity risk protection and capital benefit on reserves valued at approximately EUR 12 billion to Delta Lloyd Levensverzekering N.V., the Dutch life insurance operation of the Delta Lloyd Group. This allows the Dutch insurer to mitigate longevity risk related to its Dutch life insurance portfolio, for a fixed period, in a transaction modelled on Dutch mortality indices.

RGA describes the transaction, which has a duration of six years, as a; “Liability replication derivative based on the Dutch population mortality results.”As a result, the transaction does not directly reinsure the underlying business, but instead gives Delta Lloyd the desired longevity risk protection capital and risk management benefits.

This is the first time that Delta Lloyd Group has used the reinsurance market to transfer any of its longevity risk. The effect for the insurer is a reduction in the potential negative financial impact of its policyholders living longer than currently expected, which would result in longer durations of annuities and pension payments. The transaction comes into force retroactively on the 1 January 2014.

The six-year longevity swap was transacted directly with RGA. Given it does not involve the direct reinsurance of the underlying business, instead leveraging an index-based approach, an intermediary insurer or vehicle is not required. The deal helps Delta Lloyd to partially mitigate its risk from long-term longevity improvements, effectively reducing its longevity exposure which improves its current economic capital position.

“We are very pleased to announce this inventive, first-of-a-kind transaction in the EMEA region,” commented Johan Tuijp, Managing Director of RGA Netherlands and Nordics. “RGA’s Dutch business team worked closely with our Global Financial Solutions team and the Delta Lloyd team to find the optimal solution to support Delta Lloyd’s objectives.”

Niek Hoek, Chairman of the Executive Board at Delta Lloyd, said; “Delta Lloyd continues to explore further opportunities to manage its longevity risk efficiently through its capital management framework. This transaction provides us with medium term protection against the rising costs associated with increases in life expectancy. Ultimately, it helps the Group maintain its ratings, meet obligations to customers and other creditors and comply with current and anticipated regulatory requirements.”

“This transaction is the latest example of RGA designing and implementing creative solutions for our clients to prepare for the upcoming capital requirements in Europe,” added John Laughlin, Executive Vice President, Global Financial Solutions at RGA. “RGA has again demonstrated its ability to develop highly efficient capital and risk management solutions to support our clients’ evolving needs.”

It’s encouraging to see a longevity index transaction come to market, especially one which appears to have been structured in derivative form, the first for some time. These transactions will suit some sponsors who do not require the full reinsurance of the underlying portfolio of longevity risk. The longevity index linked derivative always held a lot of promise but lost favor among the sponsors of longevity swap deals in recent years. It will be interesting to see whether indices and derivatives for longevity swaps can make a comeback.

View our Longevity swap and risk transfer deal directory.

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