An interesting difference of opinion amongst some of the leading rating agencies has become apparent in their respective press releases regarding Prudential’s recent $26 billion pension risk transfer deal for automaker General Motors. The transaction saw GM offload a huge amount of risk by transferring $26 billion of future pension obligations to Prudential. Not strictly a longevity risk transfer deal, but along with those liabilities Prudential has assumed a very significant amount of longevity risk from the GM pension plan.
Three of the main ratings agencies have all published opinions on the deal and interestingly they don’t appear to be aligned. Generally rating agencies would have similar opinions of a transaction like this, including whether they felt it was credit positive or negative for the participants ratings. Not in this case though.
First, A.M. Best, who in their press release announced that they were affirming Prudential’s ratings just a few days after the transaction with GM was announced. A.M. Best highlight that the increasing proportion of annuity liabilities dampen Prudential’s exposure to equity market impacts, a very good point and relevant here where an annuity was part of this deal. Specifically on the transaction A.M. Best says “With the recently announced pension risk transfer transaction with General Motors, fixed annuities (both group and individual) will represent an increasing component of total statutory general account reserves. A.M. Best believes that in general, annuities are a less creditworthy line of business compared to ordinary life insurance products. It is noted, however, that Prudential has established a track record of successfully managing, and to some degree, mitigating many of the risks inherent in its various annuity product lines.” So A.M. Best seem certain of Prudential’s ability to manage the liabilities they are assuming in transactions such as this.
Fitch Ratings focus on the transaction itself and say that they expect companies with significant pension liabilities and plenty of cash will try to follow suit and transfer some of their pension risks in similar ways. They note that Prudential views the longevity risk they assume in deals like this as a natural hedge for the traditional mortality risk they hold. Fitch note though that due to the size and cost of this transaction it could limit the options of other companies seeking to replicate it. The costs to transfer the risks are high, Fitch believe in the region of $3.5 billion to $4.5 billion up front, and they also say that there is a limited number of insurance and reinsurance companies who can be counterparties to risk transfers of this magnitude. Despite that fact, Fitch do expect to see some growth in this sector.
Moody’s however hold an opposite opinion to A.M. Best and believe that the transaction is a credit negative event for Prudential. They suggest that the GM deal is putting significant risk concentration on Prudential and the asset liability management as well as longevity risks will weigh on the firm. Moody’s highlights that the GM deal will amount to over 5% of Prudential’s general account holdings. “That amount poses a significant risk concentration, given the challenges of managing a long-duration portfolio, estimating longevity risk and investing any portion of the proceeds not provided through existing investments in a low-yield environment,” said SVP of Moody’s Scott Robinson. Despite Prudential’s experience in this area and considerable skill in managing mortality risks, by assuming GM’s pension liabilities they essentially now hold the risks that GM had. One of those risks is longevity, that the pensioners live longer than expected.
This is interesting to see the different approaches from the rating agencies to discussing this deal. While Prudential are certainly capable of managing the liabilities, we tend to side with Moody’s opinion that the longevity risk could weigh on them in future. This is why we’ve always said at Artemis that the current mechanisms for longevity re/insurance, buy-ins, buy-outs and annuities will eventually stimulate capital market solutions to longevity risks. If or when Prudential can no longer stand to hold onto these longevity risks, they may become an issuer of longevity securitization bonds (in insurance-linked security form) or enter into longevity swaps with capital markets investors. Then the pipeline will be open for more transactions to flow and Prudential will likely continue to assume further liabilities.