Aegon completes third Dutch longevity hedge, covers €6bn of liabilities

by Artemis on August 13, 2015

Dutch headquartered life, pensions and annuities focused insurer Aegon has completed its third longevity risk transfer transaction, hedging €6 billion of longevity reserves in the Netherlands to further reduce its exposure to longevity improvements.

Previously Aegon has hedged and secured reinsurance for its longevity risk through a €12 billion longevity swap in February 2012 and a €1.4 billion longevity swap in December 2013. Both of these transactions saw longevity exposure ceded to capital markets investors and traditional reinsurance firms.

At this time we’re not aware what kind of risk markets Aegon has ceded this longevity risk to, whether traditional reinsurance players, capital markets investors and ILS players, or a mix of the two. Update: Canada Life Re provided the reinsurance to support this longevity risk transfer deal.

The latest longevity risk transfer transaction from Aegon was completed on the 15th July 2015 and the near €6 billion transaction is just the first part of a larger €15 billion arrangement that Aegon has agreed. The remaining €9 billion of Dutch longevity reserves will be covered in a future transaction that the insurer is actively working on.

Aegon says that this latest longevity swap “builds on previous longevity deals and underlines Aegon’s leadership in the Dutch pension market.”

Aegon CEO Alex Wynaendts commented on the longevity hedge; “We recently completed a third longevity transaction in the Netherlands. This longevity hedge, covering close to €6 billion of underlying reserves, provides downside protection for a period of 50 years against longevity improvements.”

Darryl Button, CFO at Aegon explained more on the arrangement and the remaining risk to be covered; “Actually the deal that we just announced was 40% of a larger package deal that we put together. We’ve executed on 40% of a €15bn reserve coverage deal and we’re currently out shopping and negotiating on the remaining 60% of that deal.”

“So there’s €6bn done and another €9bn to still go from that same deal,” Button continued.

One of the interesting factors about this latest longevity swap or reinsurance transaction, is that the covered cohort includes a significant number of Aegon’s younger pension customers.

Typically, longevity swaps, hedges and risk transfer or reinsurance transactions tend to cover pensioner retirees. However, increasingly the market is open to taking on longevity risk for those still working and yet to retire.

Clearly, longevity improvements are much more difficult to forecast over a longer period, so for younger pension customers, hence the fixed term nature of the coverage of 50 years.

Aegon said that the fact that it has covered younger customers is evidence “that the longevity risk transfer market continues to develop.”

As the longevity risk transfer market continues to develop, while at the same time there is increasing interest from both traditional reinsurance capital and alternative, institutional investors or insurance-linked securities (ILS) capital, it will increasingly become easier to cover these younger cohorts.

CEO Wynaendts commented; “While we have now covered longevity risk on the majority of our pension book in the Netherlands, we will continue to explore further opportunities to optimise our Dutch longevity profile.”

Button said that Aegon continues to see longevity risk transfer as an important part of its capital management and reinsurance provision; “We are still seeing appetite and demand in the market for longevity risk and we’re still going to be actively looking to lay longevity risk off in the Netherlands.”

Aegon is not just looking at Dutch longevity exposures, the insurer also has significant longevity risk on its books in the UK, from pension and annuity provision in that market. The insurer is looking at longevity hedging opportunities for its UK risk currently.

Button explained; “There’s also an opportunity to do something similar in the UK and actually we’re looking at that as well. And so we are looking at some longevity hedging for the annuity book in the UK and that’s actively ongoing.”

Update: Canada Life Re provided the reinsurance to support this longevity risk transfer deal.

We’ve added this third Aegon longevity hedge to our longevity swap, reinsurance and risk transfer deal directory.

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