Aegon net profits hit by longevity risk provisioning

Dutch based insurer Aegon reported first quarter profits were down 12% as it posted lower investment returns, was hit by administrative charges in the UK and set aside funds to manage increasing life expectancy risk in the Netherlands. Aegon have had to increase provisioning for longevity risks as increased life expectancy threatens many life and pensions companies with the prospect of paying out for longer than they expected.

Alex Wynaendts, CEO said “In the Netherlands, we have been observing a strong increase in life expectancy and are taking a prudent approach by now increasing our provisioning which will have an impact on the earnings of our Dutch business going forward.”

Their press release, available here, stated:

Updated projected mortality tables show a strong increase in life expectancy in the Dutch population. IFRS provisioning is based on yearly observed mortality tables and is taken through underlying earnings, in line with our accounting methodology. Based on this actual experience, the company takes a measured approach toward provisioning by assuming a continuation of the emerging trend of strong improvements in observed mortality for 2010. AEGON expects to add on average EUR 20 million per quarter to the provision, in addition to 2010 levels of provisioning.

Some financial observers have reacted with surprise at Aegon’s statement that they would have to continue to add €20m per quarter to their provisioning for longevity increases, having assumed that this would be a one-off charge. It is highly likely that we’ll see Aegon look to somehow transfer the risk off their own balance sheet through some kind of longevity risk transfer in the future.

Life expectancy increases are a factor that all companies involved in the life and pensions sector are going to have to get to grips with in the future. Predicted shortfalls are likely to become normal for these companies when they report their results. This suggests that longevity risk transfer, buy-out/buy-in, longevity hedging and even longevity risk securitization are likely to remain options that could become more important to these companies as time goes on.