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IV. Developments and Trends in Longevity,
Pension Close-outs and De-risking Transactions
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via Aviva’s insurance carrier to French reinsurer SCOR SE. This transaction is also noteworthy as it illustrates that transaction structures initially developed for the very largest pension schemes can be accessible to smaller schemes.
Also following a trend from 2014, we have seen sponsors establish their own special purpose vehicles for longevity transactions (namely, the 2014 transaction whereby the BT Pension Scheme established its own Guernsey-based captive and transferred £16 billion in pension liabilities to the captive, which were then reinsured with Prudential). 2015 kicked off with an announcement that the U.K.’s Merchant Navy Officers Pension Fund established its own Guernsey- based cell company and entered into a £1.5 billion longevity swap with Pacific Life Re. Industry professionals have noted that the use of cells has grown, as more pension schemes see them as a means to reduce the transaction costs associated with intermediated structures.
In February, Abbey Life Assurance Company Limited concluded a £2.0 billion longevity swap with ScottishPower UK plc. In September, Friends Life Limited (now part of the Aviva Group) executed a £2.4 billion longevity hedge and reinsurance transaction with Scottish & Newcastle Pension Plan covering approximately 19,000 defined benefit pensioners. Aviva partnered with Swiss Re for reinsurance cover. In December, Zurich Assurance and Pacific Life Re entered into a parallel insurance and reinsurance agreement covering £90 million of longevity exposure associated with 200 “named” members of a U.K. pension scheme. This transaction also illustrates the trend among small pension schemes to adapt transaction structures initially developed by larger schemes.
During 2015, and driven by the approaching Solvency II implementation date, many U.K. insurers made use of the global reinsurance capacity to hedge their own longevity exposure, not only through reinsurance of large scale bulk annuity deals (many of which are referred to above) but also through reinsurance of existing backbook transactions. There are many such transactions that have not been publicly announced.
Although not as robust as the U.K. market, the U.S. market built upon the uptick of activity that began in the fourth quarter of 2014. In January, Prudential entered into a pension-risk transfer
transaction with The Timken Company pursuant to which it agreed to assume responsibility for the administration and payment of an estimated $600 million of retirement benefits to approximately 5,000 Timken retirees. In February, Kimberly- Clark Corporation executed a “split” pension-risk transfer transaction with Prudential and Massachusetts Mutual Life Insurance Company (“MassMutual”) covering an aggregate of $2.5 billion of pension liabilities. Prudential and MassMutual will evenly share financial responsibility for the pension benefits of approximately 21,000 Kimberly-Clark retirees. November saw the execution of a pension-risk transfer between Lincoln Electric Co. and The Principal Financial Group covering 1,900 Lincoln retirees. In December, Prudential concluded a pension-risk transfer transactions with Philips Electronics North America Corporation covering $455 million of pension liabilities and a split deal with L&G’s Banner Life Insurance Company (“Banner Life”) covering $3.6 billion of J.C. Penney Corporation’s pension liabilities. Prudential will act as the annuity administrator for the split transactions with MassMutual and Banner Life.
Industry professionals anticipate that the market will expand significantly in the coming years, particularly in North America, Australia and Europe. Surplus insurer capacity and the implementation of Solvency II, which encourages insurers to hedge more of their longevity risk, are also anticipated to fuel further growth in the U.K. As a result, in 2016 we expect the number of market participants to grow and the level of activity to increase in both the longevity-only and the broader pension risk transfer market as a whole. In previous years we have witnessed a lack of standardization of terms in the market. However, with the large number of executions, and as structures are repeated, we expect this to change and for longevity transactions to become more streamlined. This is already apparent in the U.K. bulk annuity and longevity- only reinsurance markets, where “umbrella” or “master” agreements are entered into and tranches of business are added from time to time following agreement by the parties of the relevant deal-specific terms. This significantly decreases the deal execution time and related costs. We expect such structures will be a key feature of the market in 2016.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review