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Legal & General and Hannover Re participate in largest UK pension longevity risk transfer


UK insurance and investment group Legal & General has completed the largest ever UK longevity swap with the BAE Systems 2000 Pension Plan. The insurance transaction between the two covers the BAE pension plan against the risk of its 31,000 current pensioners living longer than expected, covering a total of £2.7bn of pension liabilities as measured by the plan, equivalent to £3.2 billion of liabilities using a Libor swap curve discount rate. This makes it the single largest pension insurance transaction to date in the UK.

The deal demonstrates a growing appetite from pension schemes and their sponsors for transferring their longevity risks to another party, be that insurer, reinsurer or capital markets counterparties. It also shows the appetite that the counterparties have to assume more longevity risk at this time. We wrote just last week about the rumours that a deal was being formulated and later heard that Hannover Re had been cited as one party in an upcoming deal.

Legal & General will retain 30% of the longevity risk from this transaction with BAE’s pension plan and the remaining 70% of the risk is being passed on through a reinsurance transaction with German reinsurer Hannover Re.

Hannover Re commented this morning that it had concluded another block transaction for longevity risk in the UK. Under the terms of the transaction it said that is assumes only the biometric risk, not the investment risk associated with the business.

Hannover Re said that it will generate total premium income of roughly £2.2 billion from this longevity transaction, with gross premium of around £100 million attributable to the 2013 financial year. The reinsurer said that it expects the assumed portfolio will deliver it an attractive return.

“Longevity risks are also interesting for our company because they are negatively correlated with mortality risks and hence promote better diversification of our portfolio”, Chief Executive Officer Ulrich Wallin commented.

Nigel Tinsley, Group Pensions Director at BAE Systems, said; “We are pleased to have worked with Legal & General and Aon Hewitt to develop this innovative approach to managing risk exposure within the BAE Systems 2000 Pension Plan. This arrangement offers us a flexible approach to managing the key risk of longevity in the Plan.  We are particularly pleased that we were able to complete the process in a structured and straightforward fashion within 6 months.”

Tom Ground, head of Legal & General’s Insurance De-risking Solutions for Pension Schemes, added; “Legal & General is delighted to have been selected by the Trustee of the BAE Systems 2000 Pension Plan for this important transaction. Legal & General’s strength in this market is founded on many years of experience offering de-risking solutions to pension schemes. This strength is enhanced by our ability to implement a transaction of this nature with as few as one reinsurer counterparty, which allows our clients to achieve optimum value and swift execution of the transaction.”

Martin Bird, Partner and Head of Risk Settlement at Aon Hewitt, said; “We worked closely with BAE Systems and the Trustees of the plan on this significant transaction. The insurance arrangement is fully collateralised and tailored to reflect the Plan’s unique profile, bringing together structuring capability and market capacity to enhance members’ security and reducing the funding volatility in the plan.”

Bird’s comments are interesting as we had been told a week ago that the upcoming longevity risk transfer deal that Hannover Re were involved in was a swap which was “in the market”, perhaps hinting that the collateralisation of the insurance transaction has been part funded by other sources, even third-party investors. We can’t confirm this but will update you if we hear anymore details on the transaction. See update with comment from Hannover Re at foot of article.

Matt Wilmington, partner at Aon Hewitt added; “This transaction, along with others in the pipeline, demonstrates the capacity and appetite of the global reinsurance market to take on pension fund longevity risk. While there was some comment on an apparent contraction in potential counterparties last year, the number of ultimate risk takers – the reinsurers – continues to increase in a market which is becoming ever more competitive.”

Aon Hewitt said that it expects to see a number of similar deals come to market in the coming months. This is encouraging to see the longevity risk transfer market bounce back in such a big way with a record sized transaction for the UK. Aon Hewitt also provided a useful list of all the UK longevity swap transactions to date which we list below.

Date Fund Provider Approx size Solution
February 2013 BAE Systems Legal & General £3.2bn Pensioner bespoke longevity swap
December 2012 LV= Swiss Re £800m Pensioner and all members over age 55
May 2012 Akzo Nobel Swiss Re £1.4bn Pensioner bespoke longevity swap
January 2012 Pilkington Legal & General £1bn Pensioner bespoke longevity swap
December 2011 British Airways Goldman Sachs / Rothesay Life £1.3bn Pensioner bespoke longevity swap
November 2011 Rolls-Royce Deutsche Bank £3bn Pensioner bespoke longevity swap
August 2011 ITV Credit Suisse £1.7bn Pensioner bespoke longevity swap
February 2011 Pall J P Morgan £70m Non-pensioners index based longevity hedge
July 2010 British Airways Goldman Sachs / Rothesay Lif £1.3bn Synthetic buy-in (longevity swap plus asset swap)
February 2010 BMW Abbey Life / Deutsche Bank £3bn Pensioner bespoke longevity swap
November 2009 Royal Berkshire Swiss Re £1bn Pensioner bespoke longevity swap
July 2009 RSA Insurance Group Goldman Sachs / Rothesay Life £1.9bn Synthetic buy-in (longevity swap plus asset swap)
May 2009 Babcock Credit Suisse £1.5bn Pensioner bespoke longevity swap (three schemes)

Update: We reached out to Hannover Re for comment regarding their role in the transaction to explore whether the deal had been marketed to external investors. A spokesperson told us; “It is not intended to market this longevity transaction for participation from investor and ILS fund type sources but rather to keep it as a pure reinsurance transaction. For the time being Hannover Re has the deal wholly on its own books.”

The spokesperson also told us that on the reinsurance deal between Legal & General and Hannover Re the collateral arrangements do not involve any capital sources.

Hannover Re continues to investigate the possibility of transferring longevity and mortality risks to the capital market, but the spokesperson told us that for the time being prices look rather unattractive.

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