NN Life, part of the Nationale-Nederlanden (NN Group), has entered into an index-based longevity hedge transaction with reinsurance firm Hannover Re, in a deal covering the insurer against longevity trend risk associated with around EUR 3 billion of its liabilities.
The transaction was facilitated by adviser to NN Group Longitude Solutions LLC, a specialist provider of advice and transaction services for longevity risk transfer.
It’s the first index-based longevity hedging transaction we’ve covered in quite a while. These transactions were popular at one time, but tailed off in favour of longevity swaps and longevity reinsurance deals, so its encouraging to see longevity trend risks hedged in this way again.
The NN Life transaction saw the firm enter into a population based hedge with German reinsurance firm Hannover Re, which NN Group Chief Risk Officer Jan-Hendrik Erasmus said, “Was completed at an attractive implied cost-of-capital for NN.”
“With this transaction we effectively offload part of our longevity trend risk for more than 3 billion of liabilities,” Erasmus explained.
NN Group already reserves prudently for its longevity risk, at levels above the main statistical forecasts for life improvements. However the companies solvency capital ratio (SCR) means that NN has to maintain capital at levels above even its own reserves, so longevity risk transfer is an attractive option.
Longitude Solutions founding partner Avery Michaelson explained the deal, “The transaction is designed to reduce NN’s exposure to future mortality improvements in the Netherlands, helping to manage the financial impact of pension and annuity policyholders living longer than expected.”
Longitude Solutions provided advice to assist with the structuring, marketing, documentation and execution of the index-based longevity trend hedging transaction.
NN Group’s risk margin, of around EUR 5.3 billion, is largely driven by its longevity risk and so it is attractive to reduce this by offloading some of the longevity risks associated with its portfolio.
Using an index in order to be able to transfer the longevity trend risk portion of its exposure to reinsurer Hannover Re is an efficient way to address this issue.
NN Group CRO Erasmus further explained some of the details of the transaction, “The transaction is structured in such a manner that it provides effective risk transfer. The term of the transaction is 20 years, but we are protected against a longer time period via a commutation factor mechanism that applies at maturity.”
This commutation factor mechanism actually protects NN beyond the life of the transaction, as the business is run-off, further enhancing the efficiency of the longevity hedge.
“In simple terms, if longevity improvements have been much stronger than expected this will be assumed to continue until the liabilities run-off and NN will receive a payment under the hedge,” Erasmus explained.
Erasmus said that the transaction will ultimately reduce the solvency capital requirement of NN’s Netherlands life business by EUR 35 million.
Additionally, he said that the index attachment point for the longevity hedge, “Is relatively close to our best estimate, which helps maintain the SCR relief and effective risk transfer over time.”
Now NN Group has entered into the longevity hedging arena, this was the firms first, the company intends to make this one of its levers for managing its SCR and related liabilities.
“Going forwards we will continue to explore opportunities to manage our longevity risk through reinsurance or perhaps further index based transactions,” Erasmus said.
Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.
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