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L&G sees £16bn+ longevity swap pipeline, aims to take strategy to U.S.


UK life and longevity insurance and reinsurance firm Legal & General says it is actively quoting on more than £16 billion (over US$20.7 billion) of new longevity swaps in the UK alone, and says that it wants to take its pension risk transfer strategy, including longevity risk transfer, to the United States.

The longevity swap market had been quiet in 2016, with the last longevity swap transactions listed in our Longevity Risk Deal Directory being from December 2015. Until this week that is, as a £1 billion longevity swap deal came to light yesterday.

So it’s encouraging to hear from Legal & General (L&G), in the re/insurers latest half-yearly results, that interest in longevity risk transfer remains strong and there are longevity swap transactions in the market, on which it is quoting currently.

L&G is very active in the pension risk transfer space, from pension buy-ins and buy-outs, to longevity swaps, insurance and reinsurance transactions.

The re/insurer uses longevity reinsurance capacity itself, to share longevity risks it inherits through pension risk transfer transactions. In fact L&G’s latest longevity reinsurance arrangement with Prudential, the fourth between the pair, was announced earlier this week.

L&G also underwrites longevity insurance, through traditional means and swaps, as well as also reinsuring it as well, all dependent on whether it is looking to retain or transfer longevity.

L&G sees significant opportunities within the pension and longevity risk transfer space, both live and also in its ability to offer these products abroad, with the U.S. market a particular target.

“International demand for pension risk transfer solutions remains strong and is expected to continue for many years. In the UK alone, we are currently quoting on over £13bn of buy-in and buy-out deals and over £16bn of longevity deals,” the company reported in its interim management statement.

Quoting for such transactions does not always mean that they will emerge as longevity swaps, of course, at times the traditional alternatives of straightforward re/insurance or more holistic solutions such as buy-outs can win. But the fact that there are clearly large deals in the market is encouraging for providers of longevity reinsurance capacity.

L&G also noted the importance of remaining astute to the risks associated with selecting opportunities to underwrite; “We will remain disciplined in the deployment of our capital, selecting the opportunities that deliver the best return on capital across annuity and longevity transactions.”

But a firm as large as L&G has the ability to generate a pipeline of longevity opportunities, not just through the open market but through its broader pension risk transfer, annuity business.

“Our self-manufacturing and wider asset management capabilities, together with deep understanding and management of longevity risk, mean we anticipate being able to provide effective solutions for our clients,” the firm explained.

Longevity risk is constantly under assessment at L&G, as the re/insurer seeks to maintain a healthy balance of retained and reinsured longevity risk. During the first-half L&G benefited to the tune of £58m, or 14% of the first-half’s £406m profit, due to a refinement to its valuation method for longevity swaps to bring it into line with other lines of insurance and reinsurance business.

Additionally, L&G said that longevity experience during the period was actually positive, compared to its best estimate assumption, which also helped its longevity reserve model.

In the first-half, L&G reveals that it reinsured £444m of longevity risk related to new pension risk transfer and annuity type business that it had entered into during H1 2016. Additionally, L&G retained the longevity risk from a £2.9 billion back book annuity transaction it entered into with Aegon, which benefited the half’s net cash generation.

With a UK private sector defined benefit pension market estimated to total around £2 trillion, opportunities are expected to keep flowing for pension risk transfer and longevity swaps and L&G explains that the “UK market pipeline for pension risk transfer remains strong.”

L&G said that while the pipeline for deals is substantial, the firm continues to quote diligently and build its experience in the global pension risk transfer market. The firm is seeing more pension funds looking to de-risk in stages, with longevity insurance or swaps often one of the first before it follows up with other steps such as buy-ins.

L&G feels well suited to meeting this growing pension risk transfer need, as it claims to be “unique in being able to offer all possible pension risk transfer and DB pension de-risking steps.”

And so L&G wants to recreate this strategy in the United States, a market it sees as having future promise for pension risk transfer, insurance and reinsurance. Additionally L&G said it is also looking to build on its longevity reinsurance activity, through its L&G Re reinsurer, and is quoting on several deals in this area of the market as well.

L&G sees the U.S. opportunity in pension risk transfer, insurance and reinsurance as significant, with an estimated $2.8 trillion of defined benefit liabilities across that market. As it’s experience in this area grows, we could see deal-flow ramp up which ultimately could result in a need for L&G to offload more longevity risk in future as well.

View details of many historical longevity swap and reinsurance transactions in our Longevity Risk Deal Directory.

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